Owners of the Republic: An Anatomy of Egypt’s Military Economy

Military agencies are significant economic actors in Egypt. They deliver massive infrastructure projects, produce consumer goods ranging from food to household appliances, manufacture industrial chemicals and transport equipment, and import basic commodities for civilian markets. They have expanded into new sectors as diverse as steel production, pharmaceuticals, gold prospecting, and managing religious endowments and pilgrimage. In parallel, thousands of retired senior officers have benefited from the powerful political influence of the military to occupy senior positions throughout the state’s civilian apparatus and public sector companies, securing extra postretirement incomes for themselves while complementing the formal military economy in return. Both parts of the military economy have become increasingly assertive since the EAF took power in July 2013, destabilizing market dynamics, crowding the private sector in important sectors, and altering Egypt’s path to economic growth, social development, and political transition.

The military claims to act as a developmental spearhead, generating revenue for the state and jobs, but its role comes at a high cost. Despite boasting of superior managerial skills and technological advances, it has largely replicated the business model of virtually all economic actors in Egypt since the establishment of the republic in 1952, along with the model’s adaptations to an evolving policy and regulatory environment and most of its shortcomings. This is not to say that the military is not adept at delivering engineering projects or building up its funds with income from land it controls, but that it operates in a problematic political and economic system it has done much to shape. Whatever the intentions at command level, the military’s economic strategies and activities are undertaken in an environment in which legal permissibility, discretionary powers, and bureaucratic complexity allow considerable space for predation and corruption at lower levels.

The military claims to act as a developmental spearhead, generating revenue for the state and jobs, but its role comes at a high cost.

The military does not, however, undertake this role independently. It is an integral element of the incumbent regime governing Egypt, albeit one of a wider bureaucratic constellation that also comprises senior civil servants, security officials and judges, state economic managers, and technocrats. All are informed by the same political logic in their approach to the general management of the national economy and public finances, which prioritizes appeasing key constituencies and maintaining the governing system rather than undertaking the kind of reforms that could galvanize economic productivity and mobilize domestic resources more effectively. And all seek to occupy spaces within the national economy and lay claim to public finances in proportion to their political influence, explaining the marked tendencies of both to siloing (wasteful duplication of investment and effort) and fragmentation.

The military economy is two-faced, therefore: it is self-serving, but also conforms to and reproduces the broader regime maintenance strategy. For this reason it has replicated the predominant rentier mode (reliance on the capture of existing income streams rather than increasing productivity) of the Egyptian political economy: its constituent parts have closely tracked the behavior of other actors in both the public and private sectors, and responded in similar ways to new rent-seeking opportunities opened up by major shifts in the country’s economic orientation. The military economy may offer efficiencies in some civilian activities—principally large-scale engineering works—but what comes out at the end is negative economic value as losses are obscured and the cost of capital investment often exceeds its return.

It is the government and, more frequently, the presidency who create the policy context and assign national goals; despite being a springboard to power, the military is not a full political partner.¹ Nonetheless, in working toward these policy goals—generating opportunities for myriad forms of rent-seeking along the way—the military contributes significantly to reproducing the chronic structural problems of the Egyptian economy, distorted private sector development, and the erosion of social conditions for large numbers of Egyptians. Western governments, international donor agencies and financial institutions, and foreign investors knowingly acquiesce, presenting a façade of ebullient optimism about Egypt’s macroeconomic indicators and potential while masking growing anxiety behind a slogan of “Egypt is too big to fail.”

The military’s progressive capture of state power since the popular uprising that forced then president Hosni Mubarak from office in February 2011 has transformed the scope and scale of its economic activity. The assumption of the president’s executive and legislative functions by the Supreme Council of the Armed Forces (SCAF) was followed in quick order by the military ouster in July 2013 of his successor Mohamed Morsi—the first civilian to be elected to the presidency since the establishment of the republic by the armed forces sixty years earlier—and then by the election of former defense minister Major General Abdel Fattah el-Sisi as president in May 2014. Since then, the military has come to play a major role in managing massive public works projects, supplying markets, and expanding into new economic sectors in an attempt to deliver government targets and increase state revenue.

Developments in the military economy since 2013 mark a significant transformation of scope and scale in what for decades was a protected but essentially limited enclave. Until then, the military was just “part of the deal” in which other civilian actors had their part of the overall pie—measured in ownership or control of material assets such as machinery and land or in regulatory power over licensing access to specific sectors—with the lion’s share going to politically connected business cronies of the president and, from the early 2000s, his son Gamal and clustered in the governing National Democratic Party. The relative weight of the military economy shifted at important turning points: economic liberalization and reorientation to the West starting in the mid-1970s, financial retrenchment from the mid-1980s, the first phase of privatization in 1991, and the second phase of privatization in the early 2000s. But it did not undergo serious transformation, whether measured in terms of the scope and scale of its activities, apparent net income and profitability, or impacts on other economic actors (including the public and private business sectors) and on policymaking.

Until 2011, the military principally practiced what Egypt researcher W. J. Dorman refers to as “self-aggrandizing enclavization.”² Nothing it did in the economic sphere disrupted the workings of the governing system, whose principal characteristics evolved in the era of president Gamal Abdel Nasser and through the presidencies of his successors Anwar Sadat and Hosni Mubarak—from 1952 to 2011. They still shape the military economy, whether with regard to its modalities and the symbiotic relationships between its formal and informal components or to the sense of technical superiority and moral entitlement that imbues the senior officer corps of the Egyptian Armed Forces (EAF).

However, the deepening crisis of the Egyptian political economy that produced the 2011 revolution, coupled with the repositioning of the military economy since 2013, have set the stage for deeper mutations in both. Sisi, who was elected president in May 2014, catapulted the military into a more central economic position. Since then, acting on his orders, it has managed roughly one-quarter of total government spending on a crash program of public infrastructure and housing projects, stepped in to resolve shortages of food commodities and medical supplies in civilian markets, intervened in productive sectors deemed strategic with the ostensible aim of stabilizing prices, and generally scrambled to generate revenue for the state treasury.

This degree of reliance on the military to deliver public goods and services and help attain national development goals is unprecedented even in comparison to the Nasser era, which established the pattern. Underlying it are two sentiments that set the Sisi presidency apart from its predecessors: undisguised contempt for the competence and integrity of civilian state agencies, and frank belief that only the military can escape the confines of government bureaucracy to “get things done.”³ A corollary article of faith for the president is that the military is also a far better economic performer than the private sector. “I will tell you simply,” he stated at the inauguration of greenhouses built by EAF engineers, that “it would take the private sector three to four years to complete the executive procedures to do something this big, such as roads and water projects, and to this standard.”⁴ The military shares these sentiments, making it the obvious partner to a strongman president who prides himself on making rapid policy decisions.⁵ It is moreover highly unlikely to return willingly to its pre-2013 economic enclave in the future, no matter which way the country’s economy and politics head.

The Military Economy: An Overview

Today’s military economy has evolved out of the interaction between three main spheres:

• The defense industry, founded in the 1950s, and its later offshoots that comprise officially registered and commercially oriented military enterprises involved in manufacturing and established at various times since the mid-1970s.
• Agencies of the Ministry of Defense (MOD) that are tasked with enhancing EAF self-sufficiency in food, personal kit, and other noncombat consumables, others that provide fee-paying services to civilians or produce tradable agricultural and industrial commodities, and, most importantly, EAF departments that engage in public works. Together with the defense industry, these constitute the formal military economic sector, which is discussed in Chapters 2 and 3.
• The “officers’ republic,” as I have labeled it elsewhere, which comprises the extensive, informal officer networks that permeate the state civilian apparatus as well as state-owned companies and government entities engaged in public works and infrastructure, various public services, natural resource management, and commercial manufacturing.⁶ The cloak of nominal legality enjoyed by these military bureaucrats enables and protects insider practices in the award of contracts, access to state land, and investment of EAF special funds. A subsphere consists of officers-turned-entrepreneurs and privileged private sector partners and subcontractors of military-run projects.

Common to all three spheres is their privileged access to state resources and public contracts. Military agencies arguably make a significant contribution to the economy by providing public infrastructure, though at what real cost to the state treasury and to the capacity of the civilian agencies that should have managed or undertaken national projects is open to question. The net economic contribution of the defense industry’s civilian production is considerably more dubious. The opacity or formal withholding of financial information prevents definitive conclusions about economic cost-effectiveness, but the evidence points to the inefficiencies and hidden losses typical of many state-owned enterprises in both the pre- and postprivatization eras in Egypt.

The military economy’s primary mode may be described as a kind of institutional or regulatory seizure: it captures a disproportionate share of public revenues and resources that would otherwise have gone to competing state institutions and private companies, and diverts considerable amounts of investment capital from other productive sectors of the economy. In this sense, at least, military agencies differ less than they like to claim from civilian state agencies and private firms, which are often viewed by the general public and members of parliament as corrupt, unpatriotic, and incompetent in their own rent-seeking behavior. The rentier mode is typical of the officers’ republic and of private military entrepreneurs especially, but also characterizes the formal military economic sector’s involvement in massive white elephant projects, such as land reclamation schemes and the construction of a string of failed “desert” cities.

Consequently, frequent claims made by military officials that their projects stimulate economic growth and jobs are exaggerated at best, and often demonstrably false. The urgency with which Sisi has sought to raise revenue since assuming office has only exacerbated siloing and rentierism. However, the military establishment’s preeminent political position and ability to control public discourse—enhanced by the takeover of a swath of Egyptian media by various military and intelligence agencies since 2013—enable it to paper over shortcomings and inefficiencies. Military economic agencies moreover shield themselves from external scrutiny by embellishing a public image that highlights their contribution to national development through building basic infrastructure, providing civilian commodities and consumables at discounted prices, stepping in at short notice to resolve bread shortages and other supply crises, and distributing EAF food packages to the poor during Islam’s holy month of Ramadan.

The military economy captures a disproportionate share of public revenues and resources from competing state institutions and private companies, diverting considerable amounts of investment capital from other productive sectors of the economy.

Importantly, the EAF’s senior officer corps has come since the 1980s to regard both the formal military economic sector and its more informal access to the state apparatus and civilian economy as an entitlement. Speaking in 2012, Major General Mahmoud Nasr, then assistant defense minister for finance and SCAF member, was blunt: “We will not leave the [fruits of our] sweat that shaded us for thirty years to be destroyed by anyone, and we will not allow anyone, no matter who, to interfere with EAF ventures.”⁷ Anyone seeking to subordinate the military economy to civilian control or demanding curtailment or divestment, he added pointedly, “threatens Egypt’s national security.”

Nonetheless, portrayals of the military economy’s evolution as linear, unvaryingly predatory, and orchestrated by a military establishment pursuing clear institutional interests or else captured by crony officer networks pursuing narrow selfish ones are inadequate. There has been a clear trajectory of growth and expansion since the mid-1970s, but this has been contingent on landmark political and economic events generated by others that altered its structure of incentives, opportunities, and resource availability. A handful of trailblazing studies have outlined some of the military economy’s contours, but this report parses its various components in depth in order to produce an accurate assessment of what drives each and of its positive contributions and negative impacts.⁸ By enabling a more nuanced understanding of how and why the military economy has arrived at its present shape, the comprehensive and detailed anatomy provided here can inform policy proposals to contain, reverse, and ultimately dismantle those elements that go beyond the strict needs of maintaining and upgrading the operational capability of the EAF.

The military economy has clearly grown and expanded since the mid-1970s, but this has been contingent on landmark political and economic events that altered the structure of incentives, opportunities, and resource availability.

A Sense of Proportion: Ownership, Control, and Influence

Despite its visibility and much self-promotion, the military economy does considerably less than either its representatives or its detractors claim. Even now, halfway into its seventh decade and following several years of accelerated expansion, it still accounts for a small share of the national economy. Estimates that the EAF owns or controls 25, 40, or even 60 percent of the economy are often bandied about, but are based on little data and even less systematic analysis. None specify whether they refer to the military share of annual production of goods and services or to assets, and all are highly inflated. Firstly, they confuse three distinct spheres:

• formally registered, military-owned factories, companies, and farms, whose combined output of military and civilian goods and services is measurably more modest than commonly believed or portrayed, and other military agencies such as the EAF’s Engineering Authority and Megaprojects Department that generate considerably more income from undertaking public works contracts;
• the much larger number of public sector economic authorities, state-owned enterprises, and private sector firms that are headed by or employ retired EAF officers in management positions, but whose assets and profits do not in fact belong to the military, even though it can influence their business decisions to its benefit; and
• regulatory jurisdiction to derive income from licensing land use, leasing military and public facilities, highway tolls, levies on mines and quarries, demining, peacekeeping, clearing imports, and similar fee-paying services; and investing in joint ventures with national and international private companies.

When Sisi and defense sector officials estimated the formal military economy varyingly to represent 1.0–1.5 or 1.5–2.0 percent of Egypt’s gross domestic product (GDP) in 2016, they were probably referring to the total value of goods and services produced by all military agencies: the Ministry of Military Production (MOMP), the Arab Organization for Industrialization (AOI), and the MOD and its subordinate agencies.⁹ It is unclear if these estimates specifically included MOD income from public works contracts implemented or managed by EAF departments, but this is not implausible, since all incoming funds (including extra-budgetary incomings) would be logged in the ministry’s internal books and subsumed under the overall figures provided to the president. In any case, the military has access to significant extra-budgetary income streams and accumulated funds and has come since 2013 to manage a substantial share of public capital expenditure, but its economy is both less extensive and considerably less productive than commonly believed, and certainly far less cost-effective than the military itself portrays.

The percentages cited by Sisi and others therefore appear close to the truth. But even if they are taken only as indicative, they still point to a significant overall value. Estimating Egypt’s GDP is complicated by the sharp devaluations of the Egyptian pound in March and November 2016, but in constant dollar terms the military economy’s share of GDP at that time would have ranged from $3.32 billion to $6.64 billion, using Sisi’s percentages and the figure from the International Monetary Fund (IMF) for nominal GDP of $332 billion in the 2015–2016 fiscal year.¹⁰ Indeed, these are significant amounts when the poor performance of pillars of the military economy such as the MOMP and AOI is taken into account. The “big push” of megaprojects assigned to the EAF since 2013 has increased MOD income from management fees and profit margins and consequently raised the military’s overall share of GDP, but probably only by an additional percentage point at most.

Second, inflated estimates confuse ownership, control, and influence. The military owns certain productive and services enterprises outright, legally controls access to factors of production that civilian economic actors need such as land, undertakes or manages various public works and procurements under official government contracts, and disposes of the incomes and surplus funds generated by all the preceding at its sole discretion. Although the net value of military income from sales and fees is not published in full, at least it is quantifiable should access be given to the data. Nonetheless, sufficient detail can be assembled to support the contention made in this report that the net income of the formal military economy cannot exceed a few percentage points of GDP.

Harder to assess is the income that the military derives from more nebulous relationships with public and private sector companies and with governmental economic agencies. Even after nearly three decades of privatization, the legacy of state intervention in the economy and its continued ownership of hundreds of companies and partnership in nearly as many joint ventures have also made it easier for military agencies and retirees to maintain cozy relationships and “sweet deals” across all sectors. Military businesses form joint ventures or feeder arrangements with private companies that gain access to subsidized inputs and protection from possible competitors through such relationships, or for which the military is the single or largest client.¹¹ Military agencies—or their allies in the state bureaucracy and parliament—can manipulate the award of contracts or import licenses and create nontariff barriers tailored to favor specific companies or deny entry to others (especially foreign competitors). The officers’ republic of thousands of retired EAF officers employed in government ministries and economic authorities wields the additional authority to award contracts to military agencies (and to each other).¹² And because they remain subject to the military judicial system, they have a strong incentive to ensure that the government bodies and sector companies they head or belong to comply with the military’s expectations.

The picture has shifted somewhat since 2013, as the quickening pace of compulsory takeovers of private firms (most visibly in the media) or the predatory acquisition of equity or board membership in start-ups confirms. But, in most cases, military control is indirect rather than direct, and often should instead be thought of as influence. Various studies have shown that in Egypt political connectivity is the key determinant of the access of companies (both private and public) to contracts and credit and of their overall productivity: with the lion’s share going to politically connected cronies of Mubarak’s son Gamal and his associates in the 2000s, not the military. As pertinently, close relationships between military agencies and favored private companies are mutually beneficial, and cannot be regarded as purely reflecting military control. Furthermore, a significant portion of the benefits gained by military agencies and businesses from relationships with private and public sector companies—including from controlling or influencing their procurement and investment decisions—is subsumed within the declared turnover of the formal military economy. In many respects, the principal beneficiaries of the officers’ republic are the EAF retirees themselves, who secure their sinecures by demonstrating their usefulness but in doing so primarily increase their postretirement incomes.

The third source of inflated estimates of the military economy comes from oversimplifying or misrepresenting the military’s relationship to key assets such as state land. Indeed, this kind of estimate often confuses assets with the income that may be generated from utilizing them, that is, with output or turnover. Much of the commentary asserts that the MOD owns all state land, estimated at 90–95 percent of Egypt’s surface area, but this is simply not true.¹³ The MOD holds the power to license use of state land, but in fact is one (albeit the most powerful) of several government ministries that have similar regulatory jurisdictions. So although control of land use is indisputably one of the military’s most significant economic advantages—and one of the most detrimental brakes on the general economy and private sector—the actual income derived is not directly proportional to the extent of military control. Nor can it be calculated from an assumed valuation of state land, since this has no meaningful price until it is licensed for economic or residential development and thus turned into real estate: only then does it acquire clear market value, which the military may benefit from, but not capture in whole. Nonetheless, the ability to re-designate military-controlled land has been a major source of income for at least three decades, providing the seed capital for the expansion of military farms since the mid-1980s and the acquisition or launch of new companies since the 1990s and yielding high, speculative gains generally.

Between Preservation, Politics, and Predation

The military economy’s net worth is impossible to quantify, therefore. Indeed, the contradictory figures given at different times by both the minister and official spokesperson of the MOMP for its annual turnover in the period 2014–2017 show that even the military faces problems keeping its own books.¹⁴ But in any case, trying to determine the proportion of the Egyptian economy controlled by the military is a red herring. Instead, the more consequential questions are why the military undertakes various economic activities, and what effects that has—good or bad—on Egypt’s economic growth, public services, and private sector development. The answers lie in a fluid mix of three principal drivers: an instinctive, corporate effort by the military to preserve the productive capacity of the defense industry; the striving of senior defense officials to serve the political priorities and goals of the president; and the self-serving responses of various military and civilian actors to capture the opportunities for economic predation opened up by top-level policies and projects in a highly permissive legal and bureaucratic environment.

Sustaining the defense industry built by then president Gamal Abdel Nasser in the 1950s still shapes investment and commercial strategies. Officials frequently recite the mantra that production for civilian markets is merely a means of utilizing excess capacity in military-owned factories. Yet both the MOMP and the National Service Projects Organization, which comes under the MOD, have ambitiously built new facilities, expanded production lines, and broadened their range of goods and services for civilian markets since 2013, belying the argument that they seek only to utilize idle capacity. Defense production is rarely economical unless a country is able to capture a significant share of export markets, which Egypt has completely failed to do. A major impediment in this context is its staggeringly low level of investment in genuine research and development (R&D), which has severely limited absorption of foreign technology, generation of indigenous adaptation and innovation, and increases in local content (consequently keeping value added to a minimum). Reflecting this, the minister for military production admitted that the majority of his ministry’s twenty companies were still making losses in 2018, after several years of claimed surges in production.¹⁵ The economic inefficiencies of maintaining the civilian side of the defense industry or expanding it are probably no worse than in comparable public sector companies in Egypt, but result in a similar drain on the state treasury and more dead capital (stranded assets that cannot be salvaged under present or foreseeable economic circumstances).

Serving the president’s political goals is a hallmark of military economic activity under the Sisi administration, and explains the dramatic increase in its scope and scale since 2013. The military’s role in delivering public goods and services, which is highly publicized and extolled, is believed to reinforce political stability and the administration’s domestic legitimacy while demonstrating its credibility to foreign governments and investors. “We mean business” is the intended signal to all audiences, rather than profit-making. The degree of reliance on the military to spearhead this effort is unprecedented, even compared to the Nasser era, but what the Sisi administration does share with all its predecessors, and magnifies, is an overriding technocratic bias that responds to social and economic challenges with engineering solutions and technical fixes.¹⁶

Serving the president’s political goals is a hallmark of military economic activity under the Sisi administration, and explains the dramatic increase in its scope and scale since 2013.

The most graphic embodiment of this approach is the enduring fixation on resolving overcrowding in the Nile River valley (and its consequent environmental damage, transport congestion, and loss of agricultural land) by reclaiming land in desert areas and moving the bulk of the population to new settlements there. This thinking has dominated presidential and government thinking for over sixty years, and provided a framework to justify massive investment despite the failure of almost all previous schemes. It has also given rise to an “edifice complex” that Sisi has elevated to new heights with megaprojects such as an expansion of the Suez Canal and a grandiose scheme for an entirely new administrative capital, both of which were placed under military management.¹⁷ It does not appear that any of this is instigated by the military, let alone imposed by it—with the possible exception of infrastructure and industrial development in the Suez Canal zone, which the military regards as its economic sinecure. But it is equally evident that the military shares Sisi’s mindset, including his faith in its own engineering and management skills.

Consequently, the military does not visibly object to Sisi’s approach to generating economic growth, which revolves largely around launching a seemingly endless series of construction projects. To the extent that either Sisi or the military thinks conceptually about the economy, if at all, it is assumed to be the sum-total of discrete projects to build highways and bridges, power stations and water treatment plants, desert cities and luxury resorts. There is little grasp in this top-down vision of how markets actually work, or of how to increase productivity and efficiency, generate sustained growth in investment and jobs, and enable genuine private sector development. And there is even less sense of how any of this touches on the lives of the majority of Egyptians, some 60 percent of whom were either poor or vulnerable as of 2019, let alone an inclination to pursue inclusive economic growth strategies or participatory policy development.¹⁸

Paradoxically, the technocratic bias of its state leaders and military has taken Egypt in a divergent direction from that described by political scientist Ayesha Siddiqa in Pakistan, where “military governments depend more on technocrats, especially experts in commerce and economics, and on the entrepreneurial class, to earn the bulk of financial resources channeled for military modernization that can be fulfilled from national budgets.”¹⁹ Egypt has no shortage of capable technocrats, but the lack of a clear profit motive behind this aspect of military economic activity and ambivalent relations between the military and big business have led to a fundamentally different model that has some noncapitalist aspects and is heavily based on public funding (and borrowing). The contrast is even sharper with Turkey, whose past model of military guardianship the Egyptian military now seeks to emulate, where military-owned civilian companies function wholly along business lines within competitive markets and the defense industry is privately owned and subject to normal commercial logic.²⁰

Not everything the military does in the economic sphere is overweening, damaging, or predatory. Its displacement of the civilian actors that should have been providing public housing and infrastructure compounds the shortcomings of the state apparatus, but can still make a positive contribution. Military engineering agencies moreover appear to deliver good quality, to budget, and on time—although this is far from true across the board, and often hides many costs or significant outstanding dues to civilian contractors. The core problem of the Egyptian economy lies, rather, in how the state functions, itself a reflection of how political power is generated and used. The military is evidently an integral part and a principal beneficiary of this system, and bears a major responsibility for ensuring its survival. But it has been successive presidencies, not the military, that have repeatedly decreed sinking enormous amounts of capital in megaprojects that are often based on false assumptions about expected impacts and returns.

The core problem of the Egyptian economy lies in how the state functions, itself a reflection of how political power is generated and used. The military is evidently an integral part and a principal beneficiary of this system.

The costs could be extremely high. Total government debt (domestic and external) reached an estimated 108.7 percent of GDP by June 2016, a twelve-year high.²¹ Three years later, national external debt had risen to $106.2 billion, representing 35.1 percent of GDP, and government domestic debt to 4.2 trillion Egyptian pounds (EP), which represents 92.5 percent of GDP).²² The surge of mega- and national projects under the Sisi administration reportedly accounted for 54 percent of the increase in government borrowing from Egyptian banks and foreign lenders between December 2016 and May 2019.²³ Public debt service consumed up to 40 percent of the government’s budget, and foreign direct investment was plummeting as of 2019.²⁴

The result is negative economic value added in many politically motivated projects decreed by Sisi and implemented by the military, as the cost of economic capital exceeds its return. Much of this investment represents dead capital, imposing a long-term financial drain and making it harder to pull back and follow a different approach in the future. Four years after it was launched, for example, the new administrative capital is struggling to raise the $58 billion it needs and has seen major foreign investors pull out.²⁵

The military’s central political role since 2011, and especially since the takeover of power in 2013, has made it an enabler of this economic approach. Its empowerment under Sisi may moreover be taking it to the point where it can no longer be extricated from the economy. In addition to the impacts on the national economy, this has major implications for private sector development. While the military’s managerial role in public works and housing projects since 2013 has drawn admiration domestically—including from the private sector firms subcontracted to do the actual work—its expansion into new sectors has prompted accusations of predatory economic behavior. Military entry into sectors such as steel and cement that are both oversaturated and almost fully supplied by private sector companies turns military agencies into direct competitors, for example, while elbowing aside struggling state-owned companies already operating in these sectors, rather than salvaging and making them more profitable. Furthermore, the fact that this entry is linked to providing the needs of military-managed public construction, the overall volume of which is already declining as projects are completed or government funding and foreign investment runs out, threatens to leave the military with additional stranded assets in the form of excessive manufacturing capacity. The military makes good engineers, but bad industrialists and even worse economists.

The military makes good engineers, but bad industrialists and even worse economists.

Whatever drives policymaking by the country’s political leadership and top military command, it provides a context for predation at lower levels of the military economy. The Egyptian state’s complex, indeed labyrinthine legal, regulatory, and administrative system allows considerable discretion and extensive opportunity for insider information-sharing and profiteering, rent-seeking, and capture of informal income streams. The dramatic expansion in scope and scale of the military economy since 2013 may have been intended to serve the president’s political agenda, but it builds on modes of doing business established over the preceding thirty years at least, if not the six and a half decades since the start of the Nasser era. Officer networks have followed in the wake of formal military agencies to muscle into a widening range of sectors, sometimes operating through family members to set up private companies as fronts with the goal of capturing contracts (or winning them in order to sell them on at a profit). This may also help to explain the military’s marked tendency to favor small or medium companies, often unknown, with public works contracts for which they lack the skill and capacity.

The relationship between the formal and informal spheres of the military economy is, for the most part, mutually beneficial. But their complementarity is mostly self-serving rather than adding value to public finances or to the wider economy. Distinguishing the two spheres is nonetheless necessary if they are ever to be prised apart, should the political will to do so materialize. In theory at least, so long as the overall driving forces of the military economy cannot be reduced to predation alone, it should be possible to dismantle and divest those parts of it that do not relate specifically to providing defense needs. But its evolution since 2013 may result in a qualitative transformation—not just a quantitative, linear increase—making it ever harder to dislodge the opportunistic accretions that accumulate and deepen with every passing year. The 2019 constitutional amendment empowering the military to step in when it deems necessary to “protect the constitution and democracy, and safeguard the basic components of the State and its civilian nature, and the people’s gains, and individual rights and freedoms” effectively ensures that its formal economic role and informal extensions also cannot be challenged—unless it decides to do so itself.²⁶

Research Challenges

Researching the Egyptian military economy presents challenges. Financial opacity and poor quality of data complicate estimating important economic indicators such as GDP, while the steady depreciation of the Egyptian pound, which slumped by 200 percent in November 2016, makes it difficult to convert into a U.S. dollar value. (Conversions offered in this report are based on current rather than constant or real dollar rates for the dates indicated. They should be taken as merely indicative, especially when relating to periods of major exchange rate fluctuations.) Besides these problems, compiling and fact-checking is complicated by the very vastness of the state apparatus, which has a complex structure comprising 295 so-called units and 2,449 administrative entities.²⁷ At times, government bodies and information agencies themselves appear confused about not only the proper name of certain units, but even which ministry or public authority they belong to. And when media cite military officials speaking about economic activity, they often use terms interchangeably that in fact have distinct meanings—such as output or production and turnover—or confuse these with net income or profit.

While the military establishment does not publish its financial books, it is not coy about its economic activity. Quite the opposite, officials are keen to tout supposed achievements.

But while the military establishment does not publish its financial books, it is not coy about its economic activity. Quite the opposite, officials are keen to tout supposed achievements. Consequently, this report relies mainly on open-source material, much of it primary: military company websites, the official gazette, business registers, and statements by officials and officers carried in progovernment media. This allowed listing, for example, of all general economic and national authorities, state-owned companies, and privatized former public sector companies with retired EAF officers on their boards of directors, shedding light on their preferred areas of concentration and influence. Qualitative assessment and mapping of informal practices is backed by interviews conducted from 2008 to 2019 with several dozen Egyptians—retired EAF officers, cabinet ministers, representatives, businessmen, economists, journalists, researchers, and activists—and with an additional number of non-Egyptians—foreign diplomats, international financial officials, defense personnel, and analysts. Their names have been withheld for their protection. Taken together, these various sources provide numerous data points from which relationships and the direction of resource flows can be inferred and an overall picture drawn.

Notes

Click here for the notes section of the PDF.

Underpinning the entire military economy is the ability of the Egyptian Armed Forces to leverage its official primary role in defending the nation and the formal and informal powers it wields within the Egyptian state. These are anchored in laws and their implementing regulations, presidential decrees, and other instruments that empower the Ministry of Defense and its affiliated agencies (including the EAF and its various departments), Ministry of Military Production, and the autonomous Arab Organization for Industrialization to engage in diverse forms of economic activity outside the specific, narrower sphere of defense production. This legal and regulatory framework imbues military economic actors with three critical advantages: legal permissibility, discretionary powers, and lack of transparency.

The gray area between what the legal framework explicitly authorizes and what it does not expressly prohibit has allowed new forms and avenues of commercial activity that are blatantly self-serving yet not strictly illegal. But the legal veneer of permissibility—behavior that is “undesirable but legally permitted,” to borrow a phrase from interpretations of Islamic jurisprudence—has eroded severely over time, leading to substantial encroachment on public and private assets and to frankly illegal practices. At the same time, the military has colluded with others in the governing bureaucratic constellation, of which it is a part, to promulgate legal instruments or administrative regulations (such as nontariff barriers to trade) with the specific purpose of circumventing domestic laws or international trade agreements that threaten to constrain it, while remaining formally within the law.

The gray area between what the legal framework explicitly authorizes and what it does not expressly prohibit has allowed new forms and avenues of commercial activity that are blatantly self-serving yet not strictly illegal.

The defense sector—broadly comprising all the military agencies listed above—moreover exercises very considerable discretionary powers. Over the past four decades it has acquired, and in some instances appropriated, the right to award commercial contracts, make substantial investments, and “gift” funds or other assets—such as land, bridges and highways, and food—to other state bodies, quasi-governmental organizations, and the general public, without requiring prior approval or subsequent ratification from any external authority. Nor do military agencies have to coordinate with any state body responsible for economic planning or management when designing or implementing their own trade, production, and investment strategies; forming business partnerships; or disposing of the proceeds.

The defense sector’s ability to veil its activities in the name of national security has exacerbated the opacity of information about financial transactions that is typical of many state institutions in Egypt, and which accounts for its poor ranking in Transparency International’s Corruption Perceptions Index, which worsened to 105 out of 180 countries in 2018 (from 94 in 2014).¹ But the lack of transparency has played an enabling role in the evolution of the military economy that is particularly perverse. The formal military economic sector may make claims about its efficiency in comparison to civilian or private competitors, but such claims cannot be independently corroborated or challenged. This opacity has also contributed to an environment in which insider trading, diversion of state resources, and racketeering can take place.

These trends have accelerated thanks to the assurance of impunity. The bulk of the formal military economic sector does not fall within the remit of Egypt’s audit and anticorruption agencies, whether de jure or de facto. Indeed, the most powerful of these agencies—the Administrative Monitoring Authority—is headed and heavily staffed by EAF officers—some retired but mostly still in active service—ensuring an additional layer of protection from inspection. A legislative decree issued by the ruling Supreme Council of the Armed Forces in May 2011 moreover transferred the authority to determine whether EAF officers accused of illicit gains should be tried in military or civilian courts to MOD prosecutors, even if the suspects had left service. Coming against a backdrop of neoliberal economics and crony privatization since the early 2000s that have opened up new opportunities for well-positioned actors, the outcome has been both a sharp acceleration and qualitative transformation of the military economy.

Reproducing Egypt’s Rentier System: The Historical Trajectory

Egyptian defense officials have cited various justifications for military involvement in the civilian economy. They stress the need to utilize spare capacity in the defense industry, and above all repeatedly insist that military companies and EAF agencies are able to deliver products and services (especially construction) at lower cost, break market monopolies in certain commodities, and contribute directly to socioeconomic development and trade. But although the contribution to providing public infrastructure and jobs is real, the rest of these claims are largely false and depend on several sleights of hand in how costs and benefits are calculated.

Instead, the military economy’s primary mode is rentier. It replicates the regime logic of utilizing public resources to appease key constituencies—heavily concentrated in the public sector and state institutions—while seeking rent income for itself. Contrary to the suggestion that sound economic or commercial thinking has driven it at any stage, the military economy has in fact evolved principally by capturing income streams generated by its privileged access to state-controlled funds and assets and to public contracts. Along with both public and private sector civilian counterparts, military institutional actors and interest groups have seized the opportunities opened up by major political developments in Egypt’s international and domestic environments to consolidate and expand their structural advantage within the economy.

The military economy’s primary mode is rentier. It replicates the regime logic of utilizing public resources to appease key constituencies—heavily concentrated in the public sector and state institutions—while seeking rent income for itself.

The trajectory of the military economy bears this out. Egypt’s modern defense industry was built under then president Gamal Abdel Nasser in the 1950s and 1960s, in the dual context of the conflict with Israel and of an era when economic nationalism and import substituting industrialization strategies were popular among developing countries. This was also a period in which the EAF officers were called on to assume managerial roles in the state bureaucracy, partly to provide technical skills and reduce the nascent republican regime’s reliance on the civil service it had inherited from the monarchy. The defense industry’s foray into civilian production starting in the late 1950s proved a failure, however, and the military did not become involved, as an institution, in public works and the civilian economy up to Nasser’s death in 1970.

The presidency of Nasser’s successor, Anwar Sadat, was initially marked by his struggle to contain and dismantle hostile factions in the armed forces and security services. But this gave way in the second half of the 1970s to reducing Egypt’s defense burden, resolving its perennial shortage of capital, and demilitarizing domestic politics and government. This reorientation moreover unfolded amid a strategic reorientation of military and economic ties away from the Soviet Union, toward the West, and the peace process with Israel.

These priorities shaped the military economy. In 1975, Sadat launched the AOI, a commercial military enterprise funded by Saudi Arabia, Qatar, and the United Arab Emirates, as a means of drawing significant investments to Egypt and making the country a regional industrial hub. Four years later, the peace treaty with Israel allowed significant reductions in the armed forces and defense budget. The EAF led reconstruction and rehabilitation of urban centers and infrastructure in the Suez Canal zone, funded partly by international assistance, positioning it to assert de facto claims to economic assets and activities there subsequently. The MOD was authorized to produce the EAF’s basic needs of food, noncombat equipment, and services, for which purpose Sadat established several economic agencies. From placating the EAF officer corps in the wake of the Camp David Accords with Israel, the focus of economic activity shifted to ensuring their living standards at a time of budgetary constraints.²

By one estimate, defense spending had already been reduced from 16 percent of GDP in 1970 to 9 percent in 1978, so further cuts were largely nominal, achieved mainly by moving select expenditures off government books.³ But they set the stage for the rise and diversification of a parallel military economy under Hosni Mubarak, who assumed the presidency in 1981. Over the next thirty years, the military economy underwent three distinct phases, each shaped by similar convergences of political and economic factors and equally dependent on the sector’s status as an enclave enjoying state protection.

In the first decade, Mubarak endorsed the MOD’s self-supporting approach as a means of securing political influence within a restive officer corps while shifting defense costs at a time of deepening financial austerity. U.S. economic aid of $250 million annually and other Western credit lines did not compensate fully for the cessation of official Arab budgetary assistance and development loans in 1978 or for declining revenue from petroleum exports as global oil prices dropped sharply during the 1980s.⁴ Pressure from international financial institutions to reduce the defense budget inadvertently encouraged the growth of a largely off-budget military economy. So did the behind-the-scenes contest for power between Mubarak and then defense minister Field Marshall Abdul-Halim Abu-Ghazalah, who used military production of civilian goods and services and the proceeds from exporting surplus weapons and ammunition to Iraq during its war with Iran to cement his own standing within the EAF and with the general public.

The MOD invested in food production, constructed housing and infrastructure, leased state-owned facilities placed under its authority (such as ports in the Suez Canal zone), and leveraged its control of military zones around the capital and other cities to acquire a financial return on approving the use of land for state-funded projects. Notably, military entry into food sectors such as macaroni, dairy, or bottled water mimicked the behavior of the large numbers of so-called infitah companies that had appeared in response to the economic liberalization policy introduced by Sadat in the previous decade. The military’s market share was probably much smaller than commonly assumed, therefore, and it was almost certainly leasing and land use licensing that provided the MOD with seed capital for expansion in the next stage.⁵

Mubarak’s dismissal of Abu-Ghazalah in 1989 marked a second phase, centered on a simple trade-off: the military could increase its economic engagement in return for staying out of politics. Mubarak had been compelled in 1986 to rely on the EAF to quell a rebellion by the Central Security Forces—a large paramilitary organization attached to the Ministry of Interior (MOI)—thus empowering Abu-Ghazalah. To confront the growing jihadi insurgency in the 1990s, in contrast, the president relied chiefly on the police and internal security agencies. He increased the Ministry of Interior’s manpower and budget at a rate far exceeding the MOD’s, and assigned the MOI’s State Security Investigations department to monitor EAF officers and influence their promotion.⁶

Abu-Ghazalah’s successor as minister of defense, Colonel General Youssef Sabri Abu-Taleb, curbed the military economy’s expansion.⁷ His tenure only lasted two years, but Field Marshall Mohamed Hussein Tantawi, who succeeded him in 1991, proved fully compliant with Mubarak’s goal of marginalizing the military politically. The new defense minister oversaw a veritable mushrooming of the officers’ republic as he worked to co-opt the senior officer corps: during his tenure, which was to last an unprecedented twenty years, it became standard for EAF retirees to move into posts in the state bureaucracy and public sector companies, often in sectors related to those they had served in (such as aviation or maritime transport), which literally became sinecures of those branches of the EAF.

The timing was propitious. The partial write-off of Egypt’s $50 billion debt to Western countries in return for its support for the U.S.-led intervention in the 1990–1991 Gulf crisis eased budgetary pressures on the government, while the simultaneous launch of a sweeping privatization program of state-owned companies also increased revenues. This allowed the transformation of military-owned defense companies and factories into public businesses governed by commercial rules and regulations, effectively privatizing profits while socializing losses. These and other military agencies diversified their activities and business partners over the next decade, but there is little evidence that their overall turnover or percentage of GDP grew dramatically in this period—although both presumably grew in tandem. The more important consequence of this economic reorientation was that it helped expand the military’s share of public works contracts and replicate the pattern of real estate speculation and insider trading that characterized the wider economy, in effect serving the officers’ republic more than the formal military economy.  

Resumption of the privatization program in the 2000s signaled a third phase, offering the military an opportunity to extend further into the civilian economy. It did so partly by acquiring a few failing state-owned companies or establishing new military companies, but also by seeking partnerships and joint ventures with Egyptian and foreign private businesses. Nonetheless, although the military was able to consolidate its economic enclave, this was not a period of unbridled growth. The formal military economy remained heavily reliant on MOD management of public works such as land reclamation and construction of new cities. Instead it was crony businessmen close to Mubarak, his son Gamal, and the ruling National Democratic Party who reaped the principal benefits of privatization, capturing market share in important economic sectors and overshadowing the military as the source of political connections sought by both public and private companies to win contracts. This loss of influence was a factor in the military’s discomfort with, and at times open opposition to, privatization of key state assets and the grooming of Gamal Mubarak to succeed his father, setting the stage for its siding against him during the 2011 uprising.

A brief interregnum followed Mubarak’s ouster in February 2011. The Supreme Council of the Armed Forces, which assumed the president’s powers, appeared not to have clear plans for expanding the military economy, but revealed its determination to preserve what it already had, which it regarded as necessary for meeting the needs both of the EAF as a whole and of its officers and enlisted personnel. This was the blunt gist of the statement by the assistant defense minister for finance and SCAF member in April 2012, that the military would not allow anyone “to interfere with EAF ventures.”⁸ Just how far the military would go to defend its stake was highlighted in spring 2013 when the MOD publicly compelled then president Mohamed Morsi (elected in 2012) to abandon his plans to place development of the Suez Canal zone, which the military saw as its exclusive economic preserve, under a new civilian body attached to the presidency.

This open challenge came mere months before the EAF ousted Morsi in July 2013. Having toyed with a succession of constitutional amendments enshrining its budgetary and operational autonomy from any civilian authority, the EAF now assumed a position of complete power and unbridled opportunity. If the 2011 revolution had seemed momentarily to threaten the protected status of the military economy, any remaining constraints on it were in fact removed. Under Sisi, who was elected president in May 2014, the military has emerged as a principal economic broker and manager.

Figure 2: Timeline of the Evolution of the Military Economy Since the 1950s

 

1952

The Free Officers Movement overthrows the monarchy, establishes the republic in 1953

 

Egyptian president Gamal Abdel Nasser at the opening ceremony of the Al Nasr automobile factory at the Helwan Steel Works

1954

The Ministry of Military Production is established

 

1956

Gamal Abdel Nasser’s presidency begins

 

1961

July So-called socialist decrees issued, nationalizing private companies and assets

Then defense minister Abdel Hakim Amer appointed to head the Higher Council for Public Enterprises of an Economic Character

 

1963

Egyptian military intervenes in Yemen’s civil war (which ends in 1967)

 

1964

The Administrative Monitoring Authority is established

 

1965

An EAF officer is appointed to head all major land reclamation schemes

 

1967

Six-Day War

 

1970

Anwar Sadat’s presidency begins

 

1973

October Yom Kippur War

 

1974

Start of infitah policy (economic “opening up”)

 

1975

The Arab Organization for Industrialization is established

 

1978

Camp David Accords signed with Israel; the EAF takes a lead role in reconstruction and rehabilitation of urban centers and infrastructure in the Suez Canal zone

 

1979

Peace treaty signed with Israel; annual U.S. economic and military assistance starts

The National Service Projects Organization is established

 

1981

Lieutenant General Abdul-Halim Abu-Ghazalah appointed minister of defense, plays a major role expanding the military economy in the 1980s

The General Services Agency is established

The EAF’s Land Projects Agency is established

Hosni Mubarak’s presidency begins

 

1983

MOMP subsidiaries reclassified as public sector companies

 

1984

The National Authority for Military Production is established

 

1985

Creation of “civilian construction brigades” under the MOD (comprising EAF conscripts)

 

1991

Launch of privatization under the Economic Reform and Structural Transformation Program; military-owned defense companies and factories become public businesses governed by commercial rules and regulations

Lieutenant General Mohamed Hussein Tantawi appointed minister of defense, oversees the expansion of the officers’ republic

 

1994

Founding Arab partners relinquish their shares in AOI, leaving it wholly owned by Egypt

 

(Amanda Hsu Perkins / Alamy Stock Photo)

2003

The Maritime Industries and Services Agency (under the MOD) is established; the agency receives control of Egyptian Ship Building and Repair Company and Alexandria Shipyard

 

2004

Privatization program relaunched under government of then prime minister Ahmed Nazif

 

2011

Amid a general uprising, Mubarak is ousted, and the Supreme Council of the Armed Forces assumes the president’s powers

 

2012

June Mohamed Morsi’s presidency begins

 

2013

March–May The MOD and Morsi clash over economic development of Suez Canal zone

July The EAF overthrows Morsi, and Adly Mansour named interim president

September Start of massive increase in major public works and procurement contracts managed by military agencies

 

(Hans Splinter)

2014

May Abdel Fattah el-Sisi’s presidency begins

August The MOD launches Suez Canal expansion

 

2015

March The MOD launches new administrative capital project

November Inauguration of Suez Economic Development Corridor program

November The EAF’s Land Projects Agency authorized to form joint ventures with Egyptian and foreign companies, and to use military-designated land as equity

 

2016

February The Administrative Capital Urban Development Company is made a public limited company (owned by the Land Projects Agency, NUCA, and NSPO)

 

2017

Administrative Monitoring Authority’s jurisdiction is explicitly limited to civilian individuals and bodies, effectively excluding the military

 

2018

December Egypt Defense Expo held for the first time

The Legal Framework

The enabling legal framework of the military economy has evolved continuously under the successive presidential administrations that have governed Egypt since the Free Officers seized power in 1952. The foundations were laid in the Nasser era, during which the military was exempted from paying taxes, fees, and duties and shielded from government regulations on procurement and other aspects of financial management and reporting required of the rest of the public sector. Later amendments under the Sadat, Mubarak, and Sisi presidencies reaffirmed or expanded these exemptions; reinforced the military’s autonomy, discretionary powers, and exception from divulging information to civilian authorities or submitting to external audit in relation to its about its finances; broadened its control of public assets such as land; and generally widened the scope of its economic and commercial activity.

The foundations for the military economy were laid in the Nasser era, during which the military was exempted from taxes, fees, and duties and shielded from regulations on procurement and financial management and reporting.

The special status of the military was confirmed shortly before Nasser became president of the republic in 1956. Decree 263 of 1956, which he issued while still prime minister, exempted the military’s “secret stores” from inspection by the state’s central Accounting Department (Diwan al-Muhasabah) and the Ministry of Finance and Economy, empowering the MOD to undertake this role and report on its findings to them instead.⁹ This was probably the basis for the exclusion of all military agencies and assets from civilian monitoring and audit ever since. Law 204 of 1957 next exempted the MOD and its associated entities—chiefly the EAF at the time—from “taxes and fees and financial regulations and laws amending them” in relation to armaments contracts and customs duties on imports.¹⁰ Although significant numbers of EAF officers were appointed to senior posts in the state bureaucracy—1,500 of them in 1954–1962, by the estimate of Egyptian sociologist Anouar Abdel-Malek—the military had not yet come to play a direct, formal role as an institution in the national economy.¹¹ Indeed, the MOMP, which was set up in 1954, performed so poorly that it was abolished in 1969.

The real impetus for the development of the formal military economy and its legal framework came under Sadat, albeit in distinct stages. The new constitution of 1971 gave the president authority to oversee and approve defense contracts, which was expanded in Law 29 of 1972 to include arms imports and related defense allocations (subject to ratification by parliament) and the additional power to authorize spending beyond the approved budget.¹² Sadat later used Law 29 to extend his presidential prerogatives in other ways. The revised Armed Forces Retirement, Social Security, and Pensions Law 90 of 1975, for example, drew on the president’s powers under Law 29 to prevent EAF personnel who took civilian jobs from receiving their military pensions at the same time as their new salaries. (In 1995, nearly fourteen years after his death, the Constitutional Court ruled that Sadat’s use of Law 29 to modify this provision of Law 90 had been unconstitutional. But the law and the provision both stood.¹³) And in 1980, Sadat ended the exemption of the quasi-military AOI from applying this provision of Law 90 to the retired EAF personnel it employed.¹⁴ In Law 146 of 1981, he again claimed Law 29 as the basis for expanding his powers of oversight and approval to include defense exports.

The real impetus for the development of the formal military economy and its legal framework came under Sadat, albeit in distinct stages.

The preceding laws did not relate to the military economy directly, but they established a pattern of presidential prerogative and intervention that set it on an upward trend in the second half of Sadat’s presidency and laid the basis for its accelerated expansion under his successor, Mubarak. Sadat had reinstituted the MOMP in 1971, but it remained largely dormant, and so the announcement of the AOI in 1975 represented the first significant step in building up the military economy. The AOI was in fact an anomaly: Law 12 established it not as an Egyptian company but as an “international organization,” because it had been set up in partnership with several Gulf states.¹⁵ Consequently, it was governed by its own bylaws rather than government regulations. But Sadat moved formal military agencies in the same direction. He had already relieved them of other, lesser fees, such as the so-called jihad tax levied under Law 117 of 1973, to support the national defense burden. He later extended the MOD’s exemption from paying customs duties under Law 204 of 1957 to both the MOMP and the AOI. And when he established the National Service Projects Organization (NSPO) in 1979, he empowered it to regulate itself independently of the Ministries of Defense and Finance and freed it from complying with government regulations on procurement, accounting, and auditing.

Most important, however, was the legal foundation that Sadat laid for the military’s formal control of the use of state land, which has proved to be one of its foremost assets. Law 38 of 1977 had already required tourism agencies to obtain MOD permission in order to operate in border areas, which included the country’s coasts, a principal tourist destination.¹⁶ Presidential Decree 143 of 1981 expanded this requirement to include all “desert land,” that is, any area not previously registered in cadastral surveys as zimam—owned by legal persons or entities, public or private, and subject to real estate tax.¹⁷ This encompassed an estimated 90–95 percent of Egypt’s total surface area, thereby expanding the military’s potential economic benefits significantly. Sadat followed this up with Law 531 of 1981 establishing the EAF Land Projects Agency, which was allowed to generate income from military real estate, much of which lay in desert and border areas.¹⁸

The Mubarak era expanded the prerogatives and trends established under Sadat, putting the military economy on an accelerated growth path. Law 186 of 1986 extended the customs exemption in Law 204 of 1957 to include all imports of equipment, transport vehicles, medicine, and other noncombat items, in addition to arms.¹⁹ Since then, in fact, all commodities imported by military agencies are exempt from duties, including food intended for sale in civilian markets. Law 11 of 1991 also exempted the MOD and all its affiliate branches and agencies from the sales tax, an exemption that was extended in Law 17 of 2001 to all the commanders of all EAF branches, departments, agencies, and funds, as well as to companies belonging to the AOI and MOMP.²⁰ All exemptions were routinely renewed, moreover; the exemption from customs duties was reaffirmed in Law 91 of 2005, for example, and all EAF facilities that offer commercial services (hotels, clubs, hospitals and clinics, cinemas, and supermarkets) were exempted from the real estate tax levied under Law 196 of 2008.²¹

The Mubarak era expanded the prerogatives and trends established under Sadat, putting the military economy on an accelerated growth path.

In parallel, MOMP companies were reclassified in 1991 in accordance with Public Sector and Companies Law 97 of 1983, which provided for the formation of joint stock companies.²² Two years later, the Council of Ministers decreed that MOMP companies would be relieved of the costs of defense production, which would instead be borne by the state treasury. (In theory, at least, this decree did not apply to their civilian production, but in practice the distinction does not appear to have been enforced, if annual accounts released in 2011 are a guide to their accounting practices.) In the meantime, cargo destined for military firms was additionally exempted from inspection at the country’s ports of entry. Possibly at this time also, MOMP companies were allowed to defer budgetary surpluses, that is, carry them forward to the next accounting year; these were deposited in “special funds” that they subsequently retained as disposable capital.

These legal developments reinforced the military’s special corporate status and prepared the ground for its economic expansion. But two stood out in particular: Law 89 of 1998 on bids and tenders, and the series of laws granting extensive military control over state land culminating in Presidential Decree 152 of 2001 designating “strategic areas of military importance in desert land.”

In the first instance, Egypt is a member of the World Trade Organization, but is not party to its Government Procurement Agreement.²³ This explains the significance of Law 89, which awarded government ministries and agencies extensive power to award contracts up to a certain value and within specific domains by what is commonly known as “direct order”—that is, on a no-bid, noncompetitive basis. Crucially, the law conferred the same power on the MOD and MOMP.²⁴ Consequently, all parts of the formal military economy can follow what is variously termed “limited bidding,” “local bidding,” “limited practice,” or “direct agreement” with contractors, and may delegate these powers in relation to any contract or activity falling within their remit without being subject to thresholds on the contract’s value.

Military authority over state land was formally expanded in 1988, when a prime ministerial decree required the Ministries of Agriculture and Land Reclamation; Housing, Utilities and Urban Development; and Tourism to obtain MOD permission to operate in areas it deemed of military importance.²⁵ Law 7 of 1991 consolidated and updated this authority, by requiring newly established general economic authorities also to coordinate their planned land uses and zoning with the MOD, and granted the president the additional power to delineate desert areas as strategic and of military importance.²⁶ Law 5 of 1996 did not relate to the military, but in empowering the president to set the rules and procedures governing the disposal of state land to investors for free or at nominal rent, it set the stage for the rampant speculation in real estate that was to follow, in which the military also engaged.²⁷

The most significant development, however, came in Presidential Decree 152 of 2001, which empowered the president to designate “strategic areas of military importance in desert land.”²⁸ This set out criteria that had to be met by any civilian agency or person seeking to undertake construction or other activity—whether over or under the ground, along roads, or off the shores of seas and lakes—within the vicinity of military installations.²⁹ In effect, the decree granted the MOD discretion to designate land for commercial use.³⁰ The location of strategic areas was to be determined by the MOD, which would also specify the distances to be maintained from their perimeters by new civilian construction, the permissible heights of structures built in the vicinity, and the technical specifications for waste-producing activities (solid, gaseous, or effluent) undertaken nearby.³¹ This was immediately followed by Presidential Decree 153 setting up the National Center for Planning State Land Uses, which sought to inventory and govern use of all state land, in coordination with the Military Survey Department; an MOD representative sat on the new center’s board, whose head was moreover to be approved by the ministry and has often been a retired EAF officer.³²

Notably, these various laws coincided with the partial privatization process that Egypt underwent in stages between 1991 and 2009, and with sharp parallel increases in real estate speculation and corruption. The award of contracts by direct order underpins the ability of military companies to sell products of inferior quality or at inflated prices to government agencies, and enables the military to award contracts for government-funded projects they manage to favored private contractors (or those willing to pay hefty bribes, as numerous interviews conducted for this report confirm). A former member of the short-lived government of prime minister Hesham Qandil (2012–2013) later claimed, for instance, that senior officials in his ministry had ordered its procurement department to pay a defense industry company 400 million Egyptian pounds (then approximately $63 million) for mobile phones worth some 50 million Egyptian pounds on the open market.³³

Similarly, the MOD has used its effective veto power over the use of state land and physical access to zones containing exploitable natural resources to exact licensing fees and under-the-table payments—neither of which can be quantified, but which must be considerable—from both private investors and government agencies such as the Ministries of Housing and Transport, which depend heavily on access to state land. Senior officials including the assistant defense minister for financial affairs have repeatedly claimed that the MOD merely seeks compensation for military facilities that must be dismantled or moved or for ceding land designated for military use. But such designations are always asserted ex post facto, and cannot be substantiated as the maps they are based on are kept secret. The MOD heads a “hierarchy of de jure control over unallocated public land,” as a World Bank report noted in 2006.³⁴ Obtaining military clearance for land use applications could take more than a year, creating a powerful incentive for applicants to pay bribes in order to expedite the process or jump the queue.³⁵ The MOD’s special role in land management has moreover provided officer networks with inside information, enabling them to purchase desert land at rock-bottom prices before planned developments push up its value. Possibly in response to the threat of legal action that surfaced after the 2011 revolution, SCAF head and acting president Tantawi issued Presidential Decree 45 empowering military prosecutors to determine whether accusations against EAF officers should be referred to military courts or civilian agencies, effectively removing this power from the attorney general’s office.³⁶

Predictably, all military exemptions, prerogatives, and privileges have been reconfirmed and expanded since the EAF coup d’état of July 2013.

Predictably, all military exemptions, prerogatives, and privileges have been reconfirmed and expanded since the EAF coup d’état of July 2013. A foremost instance was the amendment issued in September 2013 by interim president Adly Mansour to Law 89 of 1998 on bids and tenders, which raised the upper limits on the value of contracts that government ministers and agencies could issue directly to contractors of their choice without open bidding, “in case of emergency.” The MOD, MOMP, and their affiliated bodies were similarly empowered, as was the AOI some months later; crucially, the amended law did not state a threshold for their no-bid transactions.³⁷ Furthermore, although Article 9 of the amended law related specifically to armament contracts as defined under Law 204 of 1957, it has been taken to apply to all contracts issued by military agencies to civilian suppliers and subcontractors, including for government-funded public works.

The EAF’s resurgent political influence after 2011 and its growing role in economic management after 2013 have translated into a sharp increase in the award of contracts by direct order to the Egyptian private sector, which derives a major part of its income from public works and procurement contracts, expanding the scope for corruption and cronyism. Presidential Decree 32 of 2014, which banned third-party challenges to contracts awarded by government agencies, reinforced the ability of well-positioned actors, including the military, to capture lucrative income streams and protect themselves from inspection and prosecution at the same time. The main purpose was to prevent legal challenges to the award of public contracts and protect both the government officials awarding them and the contractors.³⁸ At the same time, Law 5 of 2015 exempted military agencies from complying with the requirement that government procurement contracts prefer Egyptian manufactured goods, allowing them to turn to foreign imports if they wished.³⁹

Several subsequent laws related to the military more directly. Most significantly, Presidential Decree 446 of 2015 authorized the EAF Land Projects Agency to utilize its assets as equity in forming joint ventures with domestic and foreign companies. Exactly one month later, Presidential Decree 127 authorized any government entity to establish public limited companies after obtaining cabinet approval, paving the way for further military companies and joint ventures.⁴⁰ The effect of granting the military commercial utilization of state land and, de facto, retention of all incomes arising from that, was demonstrated when Presidential Decree 57 of 2016 instructed the agency to form a public limited company (along with the MOD’s NSPO and the Ministry of Housing’s New Urban Communities Authority) to manage the new administrative capital project and the Sheikh Mohammed bin Zayed City.⁴¹ These decrees further magnified the scope for real estate speculation, reflected, for example, in the discernible shift of commercial land developers’ attention from previously desirable areas such as New Cairo to the new capital.

The military’s tax exemptions have also been reaffirmed or extended. In 2016, military agencies were again exempted when the sales tax was converted into a value-added tax (VAT) as part of IMF-inspired reforms.⁴² The military does not have to pay VAT on goods, equipment, machinery, services, and raw materials needed for the purposes of armament, defense and national security, nor on any goods or services sold by military agencies and outlets such as MOD-owned hotels or NSPO petrol stations. And when Sisi imposed a 25 percent levy on the deferred surpluses of governmental “service, economic, and national general authorities” to the benefit of the state treasury in the same year, he exempted the National Authority for Military Production, which manages MOMP companies.⁴³ In May, Presidential Decree 233 designated twenty-one national roads as “strategic zones of military importance” that, combined with prior laws, effectively granted the MOD exclusive commercial franchise along them.⁴⁴ Five months later, amendments to the Military Judiciary Law brought all incidents occurring at or in civilian areas and facilities run by the military, such as petrol stations serving the general public, under the jurisdiction of military courts.⁴⁵ Legislation passed in 2014 had already placed all “public and vital facilities,” such as ministries and universities, under military jurisdiction for two years, and in 2016 this law was extended to 2021.⁴⁶ Other advantages followed, such as the exemption of the defense sector from a 43 percent government-mandated increase in electricity prices imposed on industrial manufacturers in 2018.⁴⁷  

Last but not least, the military economy was shielded even further from external audit. The de facto exclusion of the military generally from inspection by the Administrative Monitoring Authority (AMA), Egypt’s main audit agency, was made de jure when its jurisdiction was specifically limited to civilian individuals and entities in Law 207 of 2017.⁴⁸ As importantly, the same law made the AMA directly accountable to the president, who was also given the power to appoint its head, effectively confirming it as a tool of presidential power and cementing his influence over the military. Former prime minister Ibrahim Mahlab had moreover designated the AMA two years earlier as a government agency whose contracts were classified as secret “for national security reasons,” effectively exempting it from Law 5 of 2015 requiring government agencies “to buy Egyptian” and further enhancing its distinctiveness and autonomy from civilian agencies.⁴⁹

Extending and Bending the Rules

The legal framework summarized above reveals a skeleton upon which are hung a host of prerogatives that appear to be asserted de facto as often as awarded de jure, and from which emanate practices that range from the formal to the informal and frankly illegal. The military economy operates within a complex and labyrinthine body of laws and bylaws that are not harmonized and often conflicting, having accumulated over decades during which powerful institutional and social constituencies lobbied hard to acquire or preserve economic gains as the government instituted major changes of economic orientation: from the capitalist mode of the pre-1952 monarchy, through socialist nationalization under Nasser, controlled liberalization under Sadat, and finally under Mubarak to a nominally free market system that in fact combines an extensive residual role for the state in ownership and capital expenditure along with crony capitalism. An equally complex and fragmented administrative structure for managing public finances and assets makes it even harder to enforce rules and regulations that, to paraphrase the 2006 World Bank report cited previously, encompass a multitude of differentiated, nontransparent, complex, and arbitrary procedures.⁵⁰

Among the numerous legally sanctioned advantages enjoyed by the formal military economy are preferential access to building materials, public infrastructure, subsidized energy, and, crucially, hard currency at discounted rates.

Among the numerous legally sanctioned advantages enjoyed by the formal military economy are preferential access to building materials, public infrastructure, subsidized energy, and, crucially, hard currency at discounted rates.⁵¹ Some advantages are provided in laws of establishment and may also be enjoyed by civilian public agencies and private businesses (such as energy subsidies). But others may be tucked away in bylaws such as those of the revised Mineral Wealth Law 198 of 2014, for example, which required MOD approval for the extraction of mineral wealth anywhere in Egypt and empowering it to levy fees on all output at production sites.⁵² Military economic entities can furthermore maintain deposits in banks of their own choosing—unlike civilian government agencies that may only hold accounts with the Central Bank of Egypt—and can hold foreign currency accounts and access extra-budgetary financing without government supervision.

But the military economy also benefits from a marked degree of ambiguity. Senior defense industry officials have occasionally claimed that the sector is subject to normal taxes, but this is certainly untrue. In January 2017, Minister of State for Military Production Major General Mohamed al-Assar made a significant distinction by stating that the industry paid taxes, customs duties, and social security contributions on the civilian side of its production, while acknowledging that similar payments were not made on military output.⁵⁴ But confusion remains about the legal status of military companies that are registered as part of the public business sector, and of the joint ventures with private companies, both domestic and foreign, that military agencies have been permitted to establish under Presidential Decree 127 of December 2015. Nominally, they should come under normal tax regulations, but in practice they do not, as Assar admitted. Nor is there any evidence (or public claim) that the MOD pays taxes or other contributions on net income its agencies make from managing public works projects. No less importantly, all military entities, facilities, and assets come exclusively under the jurisdiction of military courts, and so the rights of civilian business partners involved in joint ventures or even as subcontractors fall into a legal gray zone that has yet to be tackled by Egyptian legislators or policymakers.

Similarly, Law 6 of 1984 establishing the National Authority for Military Production (NAMP), which oversees MOMP companies and factories, confirmed that their boards of directors would receive bonuses and incentives and a share of profits. The introduction of commercial incentives followed practice in the rest of the public business sector after 1983, but the absence of external oversight over the defense industry meant that there has been no way of verifying actual performance or confirming that profits (net of all expenses and contingencies) have in fact been made. NAMP annual balance sheets released in 2011 showed none, and Assar has repeatedly acknowledged that most MOMP companies incur losses, suggesting that bonuses and shares of supposed profit are calculated on the basis of turnover (overall financial flows handled) and distributed to directors and managers before net balances are calculated. A decree issued by Sisi in September 2016 that personnel of the NAMP and its subsidiary companies should receive “not less than 25 percent of net profits” (emphasis added), but the lack of transparency surrounding NAMP financial accounts and bylaws prevents definitive assessment, not only of its economic viability, but also of legal compliance.⁵⁵

All military entities, facilities, and assets come exclusively under the jurisdiction of military courts. The rights of civilian business partners involved in joint ventures or even as subcontractors fall into a legal gray zone.

As noted previously, the formal military economy is empowered by law to operate outside much of the regulatory framework that applies to other state institutions. In some cases, as with the mining sector noted above, specific bylaws govern the military’s income generation from public assets or natural resources. Less clear is what regulates the charging and retention of fees or profits from public works and commercial franchises, investments in and dividends from commercial companies, and employment of conscript labor, both in the latter and in profit-making activities. The latter example is particularly egregious. EAF conscripts are used as cheap labor in virtually all sectors of the military economy. The practice started in 1986 when then minister of defense Field Marshall Abdul-Halim Abu-Ghazalah announced that 30,000 conscripts would be organized into so-called development battalions to contribute to the national economy.⁵⁶ Over thirty years later, these battalions (now known as civilian construction brigades) are still employed to implement publicly funded projects, especially in construction, agriculture, and land reclamation, whether undertaken by public or private contractors. MOD, MOMP, and AOI companies also employ conscripts who are in their final six months of service, and sometimes for considerably longer, and interviews confirm that skilled conscripts are routinely loaned to private sector companies.

Last but not least is the extent to which the military’s legally sanctioned presence in various state bodies and informal relationships with civilian officials and legislators enables rules to be bent to benefit the formal military economy. Political scientist Robert Springborg noted, for example, how Abu-Ghazalah used his position as chairman of the Ministerial Policy Committee in the 1980s to award land reclamation contracts to military agencies or withhold them from their public sector rivals (and offer sweet deals to retired EAF officers and private sector businessmen).⁵⁷ A World Bank working paper published in 2018 confirmed that such political connections remained important in obtaining government contracts to procure goods or services, some thirty years later.⁵⁸ More generally, as big businessman Naguib Sawiris complained, the military can get work done because “when it gets involved permits are unimportant, it doesn’t have to pay bribes, and it can overcome all the problems that we all wish we could overcome.”⁵⁹

Military agencies and affiliated companies or private sector partners also benefit from other legal devices such as nontariff barriers to trade, which can be designed to favor particular companies and exclude competitors, including foreign ones.

Military agencies and affiliated companies or private sector partners also benefit from other legal devices such as nontariff barriers to trade, which can be designed to favor particular companies and exclude competitors, including foreign ones. As economists Ishac Diwan, Philip Keefer, and Marc Schiffbauer note, trade protection is firm- and not sector-specific in Egypt, which had one of the highest nontariff barrier frequencies in the world in 2010.⁶⁰ Government agencies can skew markets in additional ways: three months after the MOMP concluded a partnership with the Chinese firm Galantz to manufacture air conditioners locally in June 2016, for example, the authorities restricted the import of foreign-made air conditioners.⁶¹ Military agencies were able to secure a similar legislative amendment that blocked competition from more highly specialized Dutch companies for large water projects. And when legal devices fail, the EAF is known to resort to means such as blocking the entry of imported machinery to Egypt in order to compel companies to accept its terms—such as receiving a share of factory output—in return for issuing the necessary licenses allowing them to set up in certain geographical zones or manufacturing sectors.⁶²

A Legal Balance Sheet

Military agencies are not alone in enjoying economic advantages afforded by the law. Many state agencies and public companies were also exempted from paying customs duties on imported goods during the Nasser era, subsequently reaffirmed in Law 91 of 1983.⁶³ So were importers of goods and services for trading purposes, exports, basic foodstuffs, catering, natural gas, books and magazines, and goods used for scientific, educative, and cultural purposes. Most importantly, the private sector had been allowed to import building materials free of duties starting in 1977; this was a major advantage because construction, which accounted for a large part of public contracts awarded to the private sector, was never fully nationalized.⁶⁴ But because the public sector continued to monopolize the distribution of building materials, officials could expedite or delay allocations to extract bribes and sell to the black market.⁶⁵ Most of such advantages remain in place. Furthermore, as Egyptian political economist Amr Adly has noted, the private sector’s contribution to state revenue through taxes on industrial, commercial, and capital gains is also small, not exceeding 7 percent in 2008–2012, because of tax evasion among small and medium-sized enterprises and broad tax exemptions and government incentives for large companies.⁶⁶ Similarly, property taxes from all sources averaged 2.9 percent of state revenue in the same period. Tax exemptions for the military are therefore part of a general problem for state revenue, and may not make an appreciable dent in the budget deficit on their own.

In fact, all economic actors in Egypt benefit from extensive loopholes in the regulatory framework, as a 2003 World Bank report described:

Although the Law and the Executive Statutes provide important concepts for public procurement and are based on sound principles, they are broad and not always sufficiently clear for consistent application. To compensate for this lack of clarity and completeness of the written law and statutes available to them, different ministries have created their own unwritten procurement “rules.” These unwritten “rules” have become known to bidders only through application to actual cases and can vary. Consequently, discretionary decisions by the Competent Authority have become the rule rather than the exception, as for example, in the selection of the applicable procurement method or acceptance of bid modifications after the bid opening.⁶⁷

Military companies are also not alone in benefiting from the legal preference that allows awarding government contracts to Egyptian companies whose bids are within 15 percent of competing bids.⁶⁸

The preceding emphasizes that, to a considerable degree, the problem for Egypt is not that the military is different from its civilian counterparts, but rather that it is very much the same. The military’s advantages are rooted in law, but along with many others in the state bureaucracy, it uses its considerable discretionary power to bend the rules and assert rights that are not explicitly sanctioned in law or that clearly exceed, if not frankly violate, its provisions. The legal and regulatory framework affords all wide scope to further their economic interests while remaining ostensibly within the law.

The problem for Egypt is not that the military is different from its civilian counterparts, but rather that it is very much the same.

What determines the balance between formality, informality, and illegality is the degree of political influence or connectedness of each interest group. This has not always favored the military; under Sadat, the balance shifted clearly toward the new, so-called infitah bourgeoisie, while National Democratic Party bosses and allied business cronies were the primary beneficiaries in the last decade of Mubarak’s rule. But his ouster in 2011 and the subsequent transformation of the military’s political and economic fortunes since 2013 have shifted the scales for the foreseeable future. The military’s full legal and constitutional autonomy from any form of civilian jurisdiction—whether executive, legislative, or judicial—ensure preservation of the military economy even as it intrudes into its civilian counterpart.

Notes

Click here for the notes section of the PDF.

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

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

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

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

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

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

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

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

Grand Plans . . .

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

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

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

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

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

. . . Dubious Results

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

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

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

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

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

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

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

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

Enduring Handicaps

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

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

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

Poaching as an Economic Strategy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Research and Development Handicap

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Preserving the Military Industrial Enclave, Replicating the Past

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Slow Motion: Railways and Electronics

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

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

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

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

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

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

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

Conclusion: The Last Refuge of Nasser-Era Enterprises

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

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

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

Notes

Click here for the notes section of the PDF.

The Ministry of Defense represents the second main pillar of the formal military economy, but unlike the loss-making defense industry, it makes a significant contribution to extra-budgetary military funds. Together, the diverse range of departments, agencies, and companies the ministry encompasses provide the EAF with noncombat consumables and services and, increasingly importantly, undertake major public works under contract to government ministries and authorities. These MOD bodies, which include the EAF itself and its affiliated departments, have made tangible contributions in providing diverse civilian goods and services—from highways, bridges, and housing to intermediate chemicals—but at heavy cost. Just how heavy is obscured by the deliberate lack of transparency on the real economics of production, hiding considerable amounts of dead (that is, nonfunctioning) capital and opportunity cost sunk not only in the important white elephant schemes managed by the military but even in sectors that could contribute positively to social and economic development.

Most significant among the economically active MOD bodies are the National Service Projects Organization and the EAF Engineering Authority and Works, Megaprojects, Water, and Survey Departments, which are also backed by the Technical Consultancy Bureau in the Military Technical College. These departments moreover liaise closely with civilian bodies in which the MOD has a direct role by law, most prominently the National Center for Planning State Land Uses, and other major contracting public entities such as the Ministry of Housing’s Central Construction Agency and New Urban Communities Authority. The MOD also comprises half a dozen additional departments that perform economic functions and report directly to it, such as the so-called Mining Sector, as well as several maritime companies, and owns shares in a number of nonmilitary joint stock companies.

MOD-affiliated bodies differ considerably from the defense industry companies and factories belonging to the MOMP and AOI in terms of primary activity and categories of products, but their income-generating activities reveal similar characteristics. They benefit from an enabling regulatory framework of tax and customs exemptions and permission to receive state loans, retain revenues, carry surplus funds over fiscal years (customarily to be deposited and retained in their “special funds”), and hold deposits in commercial banks of their choosing.¹ They offer tangible contributions to public infrastructure and lower-income households but also reveal questionable commercial viability in terms of net cost to the treasury and of the quality of goods sold to consumer markets. And rent-seeking officer networks that straddle MOD-linked bodies, state-owned economic enterprises, and general authorities again play a significant role in steering contracts and investments.

The National Service Projects Organization

The NSPO is an economic arm of the MOD but also a significant pillar of the military economy in its own right, listing thirty-five companies by 2019. As the reference in its name suggests, it employs young Egyptian males conducting national military service in the EAF, for terms of between eighteen and thirty-six months depending on educational qualification. The potential labor pool is massive: an estimated 1,551,000 Egyptian males reach the age for military service annually.² But although Sisi stated in 2015 that the EAF’s intake was around 1 million conscripts, Janes’ Sentinel Security Assessment and the International Institute for Strategic Studies more credibly estimated their number in service at between 220,000 and 410,000 in 2016–2017.³

Founded by Presidential Decree 32 in 1979 “to study and implement works and projects for ministries, [government] authorities, local government, and public sector companies,” the NSPO’s trajectory reflects the evolution of Egypt’s politics and economy.⁴ Its budget for the 1982–1983 financial year was EP50 million; nearly thirty years later, Major General Mahmoud Nasr, then assistant defense minister for financial affairs, stated that NSPO annual turnover had reached EP6.3 billion ($1.06 billion) in 2011, with net profits since 1990 of EP7.7 billion.⁵ The NSPO Board of Directors includes the heads of the MOD’s Organization and Administration Authority and Logistics Authority; the ministry’s Financial Authority is believed to supervise the NSPO and monitor its projects.⁶

A Conscript Economic Army

The NSPO was transformed by then EAF chief of staff Lieutenant General Abdul-Halim Abu-Ghazalah following his appointment as defense minister in March 1981. An ambitious figure, he was promoted by Mubarak to the rank of field marshall and made deputy prime minister in April 1982. Under his direction, the NSPO set up a Food Security Division with the aim of providing much of the EAF’s needs, in particular of livestock and poultry, eggs and dairy products, and bread. According to political scientist Robert Springborg, the NSPO also sought loans from the Principal Bank for Development and Agricultural Credit to prepare conscripts to undertake similar activities upon finishing their military service. In 1986, Abu-Ghazalah also announced that the EAF would organize 30,000 conscripts into development battalions.⁷ These battalions have been a source of cheap manual labor for both public and private companies undertaking public works projects ever since, working under the EAF Engineering Authority (rather than the NSPO).⁸

The rapid expansion of the NSPO reflected various factors. In 1986, Abu-Ghazalah and Mubarak claimed that half its earnings were spent on supplementing meager EAF salaries, with the other half going toward clothing, accommodation, and maintenance of equipment.⁹ The NSPO moreover followed in the footsteps of civilian businessmen who were benefiting from the partial liberalization of trade to invest in food, dairy, macaroni, and bottled water production in this period.¹⁰ As was the case for the MOMP’s defense companies and factories, the NSPO also provided an opportunity to replicate the military “old boy” networks and clientilism established in the Nasser era. Much like then EAF commander in chief and defense minister Abdel Hakim Amer, who sat on the Higher Council for Nationalized Enterprises in the 1960s, Abu-Ghazalah chaired the Ministerial Policy Committee starting in 1986, which enabled him to award land to the NSPO for reclamation and cultivation while withholding it from adversaries and to favor EAF retirees joining the private sector and their civilian partners with contracts.¹¹

In any case, by 1986 the NSPO was already estimated to account for almost 5 percent of all housing construction and 18 percent of food production nationwide, which political economist Safinaz Tarouty valued at EP488 million.¹² These figures have not been confirmed, and seem excessive for a food production sector estimated to employ 5,000 EAF personnel at the time.¹³ Nonetheless, the NSPO also started production of macaroni across the country three years later, and subsequently grouped all its pasta factories into a single enterprise. It also set up support facilities such as an automated vegetable wrapping and packing plant.¹⁴

Thanks to these activities, NSPO annual turnover grew from EP11 million in 1979 to EP644 million by 1990.¹⁵ This enabled a new phase of expansion. Reflecting the commercial opportunities provided by networking between various parts of the military economy and the public sector, the NSPO branched out in 1992 by constructing six gas stations to serve civilian markets, again using conscripts. These stations were brought under a new subsidiary called Wataniyyah in 2002, which subsequently expanded countrywide; the company now claims seventy-one stations.¹⁶ Sales of petrol, oil, and lubricants produced by NSPO companies ensure a large profit margin since they are acquired at a discount from refineries in which the General Intelligence Directorate is de facto gatekeeper. Wataniyyah has also sold detergents produced by the EAF’s chemical warfare branch since 2015.¹⁷ Following the military takeover in 2013, a former head of the General Authority for Petroleum, which is responsible for supply to civilian markets, complained that “most stations don’t even receive their full quota of petrol, after more fuel was assigned to state gas stations owned by the armed forces.”¹⁸ Wataniyyah has diversified following market developments; introduced charging stations for electric vehicles at its stations in 2018, and won government approval to host conversion facilities for dual-fuel vehicles (to use natural gas) in 2019.¹⁹

NSPO expansion accelerated during the 1990s, with a continuing primary focus on agribusiness and labor-intensive services. In 1993, it established the National Company for Public Contracting and Procurement, followed a year later by a company producing plastic sheeting, and in 1996 by another producing fruit juices and jams, pickles, and olive oil. Nasr Company for Services and Maintenance (originally named Queen Service) was started in 1998, offering cleaning and sanitation, security, maintenance, and management of equipment and facilities including hotels, heavy haulage, and general procurement services for government and private companies, including supplying and importing food.

As significant was the NSPO’s entry into the land reclamation market. In 1998 it established the Upper Egypt Company for Agro-Industry and Land Reclamation, which produced a range of farming goods. A year later it also established the East Owaynat Land Reclamation Company, which took over 100,000 feddans (42,000 hectares) in the Western Desert from a reclamation project launched in the early 1990s. It subsequently established farms irrigated by underground aquifers to produce cash crops for export to Europe; it claims to have provided the Ministry of Supply with 78,000 tons of wheat in 2015, and has leased land to Egyptian and foreign companies and to local farmers in the area.²⁰ Some experts believe the East Owaynat aquifer may be nonrenewable; the same is true of the Siwa aquifer whose water is marketed by the NSPO’s Safi National Company for Producing and Bottling through twenty-seven outlets countrywide, as well as supplying troops under the U.S. Central Command and the Multinational Force in Sinai.²¹

As these examples show, the NSPO experienced a growth spurt in the last decade of Mubarak’s rule, mirroring other sectors of the military and civilian economies. Its National Company for Road Construction and Development completed a highway from Cairo to the Red Sea resort of Ain al-Sukhna in 2004; meanwhile, civilian public sector companies such as the Nile General Company for Road Construction built roads and an airport serving NSPO production sites in East Owaynat.²² From 1995 to 2004, the NSPO had also constructed or rehabilitated four museums, twenty-two archeological sites, and 390 schools, and in 2008 it consolidated its pasta production lines under the Queen label. Considerably more important was its construction of the Arish cement plant, which it took over when major civilian competitors balked at the starting price of EP300 million ($54 million) for the project license in 2007.²³ By this point, the NSPO had become a holding company, having acquired existing state-owned enterprises—the Arab International Optronics Company and Nasr Company for Intermediate Chemicals—and having set up an elevator company.²⁴

Post-2013: Favored Contractor

The real market value of NSPO output cannot be verified, but according to one source, its closing accounts showed turnover of EP1.63 billion in 2012–2013, with profits of merely EP63 million.²⁵ Whatever the truth, the EAF’s ouster of Morsi in July 2013 opened the way to unbridled growth. Between October 2013 and February 2014, the interim government headed by Hazem el-Beblawi awarded contracts by direct order to the NSPO to fund, build, and maintain two national highways. This included the exclusive right to charge tolls, sell advertising space, and lease land for the next ninety-nine years in the case of the Rod al-Farag corridor around Cairo, and for fifty years on the desert highway between Cairo and Alexandria.²⁶

The Egyptian Armed Forces’ ouster of Mohamed Morsi in July 2013 opened the way to unbridled growth.

The government’s General Authority for Roads, Bridges, and Maritime Transport immediately annulled existing permits of private sector advertising companies in Rod al-Farag, and in July 2014 also ceded the right to license advertising on additional stretches of the road network around Cairo to the NSPO, with which it will split profits for fifty years.²⁷ The NSPO meanwhile increased heavy transport tolls on the Cairo–Alexandria highway by 800 percent; under its leasing arrangement the NSPO will pay the government roughly EP5 million in fees each year, but earn EP800 million annually ($112 million at the time) for the duration of its fifty-year franchise.²⁸ (It is unclear how much of the cost of building and maintaining these and other highways and “national” roads managed by the military will be borne by the state treasury, which is responsible for this under Public Roads Law 84 of 1968.)²⁹

The NSPO went from strength to strength: in 2014–2016 alone it won new contracts by direct order from individual government agencies to install traffic cameras at 250 junctions in Cairo Governorate for EP260 million, build a services complex in Gharbiyyah Governorate for EP240 million, a wastewater treatment plant and two electricity stations in New Heliopolis for EP200 million and EP230 million respectively, and four buildings for the Matrouh branch of Alexandria University valued at EP346 million, and renovate the great pyramids site near Cairo for a modest EP20 million.³⁰ The NSPO also partnered with the Ayadi Company for Development and Investment, a state-owned public-private partnership established in March 2014, and the National Agency for Development of Sinai to develop northern Sinai through investments in local industry, agriculture, and other sectors.³¹ The government meanwhile decreed that operation of 500 kilometers of national roads being constructed by the Housing Ministry’s Central Agency for Construction connecting the Farafra oasis (a focus of military economic activity) at a cost of EP2.275 billion would be awarded on completion to the NSPO, which would levy tolls and run its Wataniyyah service stations.³²

The NSPO has also expanded the activity of its security company, Queen Service, founded in 1988 and subsequently renamed Nasr Company for Services and Maintenance.³³ Still known by its former name, Queen Service has won numerous protection and service contracts since 2013 from clients including the Cairo subway, state banks, public universities, and government ministries. In late 2013, it won a $600 million contract from a group of Saudi and Arab investors to provide integrated services for hospitals in Egypt. This added to its portfolio of managing se