Sudan’s political transition marked a significant milestone on March 17, 2021, when its interim authorities agreed to transfer military-owned commercial companies to the control of civilian-headed government ministries. This was remarkable in a country dominated by the armed forces almost uninterruptedly since the late 1950s, all the more so as the issue of divestment had been a bone of public civil-military contention for a cash-strapped government over the preceding year.
While the agreement is an encouraging first step, comparable experiences worldwide underline that military divestment may be partial and incomplete even when civilian authorities are in clear command. Sudan’s contested political arena and fragmentary security landscape point to far more intricate negotiations ahead and an even less assured outcome. Indeed, the agreement contained little, if any, detail on how and when restructuring will actually take place, suggesting that some of the more difficult issues may have been kicked down the road, if not into the long grass.
Military divestment in any country is exceedingly complex and slow. Getting it right is essential to avoid the failure of companies transferred to civilian ownership and the disappointment of increased revenue expectations. Such outcomes may lead to a political backlash among the population that the military can exploit to stall or even reverse the process. Success hinges on two things: full financial disclosure by military companies, enabling the kind of forensic audits necessary for evaluating their performance and the cost-effectiveness of different options for integrating them into the civilian sector—including through mergers, sell-offs, or liquidation; and the state of the public business sector generally, the effectiveness of its governance and strategies for its overhaul.
A Fragile Political Context
The March 17 agreement comes against a backdrop of distrust and frustration between the military and civilian components of the military-headed interim Sovereignty Council that acts as Sudan’s presidency in accordance with the Interim Constitutional Declaration of mid-August 2019. It also comes amid fractious politics among the parties represented in the civilian-headed transitional council of ministers, which delivers routine government functions and sets policy. Disagreement over the respective mandates of the Sovereignty Council—especially of its chairman, General Abdel Fattah al-Burhan, commander in chief of the Sudanese Armed Forces (SAF)—and the council of ministers has flared up repeatedly. This was made evident in December 2020, when Burhan announced the formation of the new Council of Transitional Period Partners that had been proposed in a constitutional amendment in October as a means of resolving differences impeding the political transition; the council of ministers deemed he had expanded its powers excessively and overstepped his own remit. Simmering tensions also resulted in the resignation in February 2021 of the military head of the Empowerment Elimination, Anti-Corruption, and Funds Recovery Committee that was originally established in December 2019 to dismantle political and economic remnants of the regime of ousted dictator Omar al-Bashir.
Additional disputes loom over the formation of a Transitional Legislative Council, which is already two years late, and the scheduled transfer of the Sovereignty Council to a civilian chair in February 2022. This may well prove to be a make-or-break moment, failing which the parliamentary elections that are supposed to be held at the conclusion of the thirty-nine-month transitional period might not take place, jeopardizing the entire process. The deaths of 144 people in renewed violence in West Darfur in early April 2021 are a stark reminder of the political transition’s fragility.
Overshadowing the potential for violence is the continued salience of the paramilitary Rapid Support Forces (RSF), which is the third leg of the interim governing structure. Its commander, General Mohamed “Hemedti” Dagalo, is also deputy chairman of the Sovereignty Council. Drawing on his strong tribal base in Darfur and close alliance with the United Arab Emirates and Saudi Arabia, he projects himself in a high-profile foreign policy role and is regarded by some in Sudan as the country’s strongman and de facto president. Burhan exercises greater power in fact, as head of the SAF, Sovereignty Council, Council of Transitional Partners, and the National Security and Defense Council, but the RSF’s constitutional designation in the Bashir era as a “regular force” puts it on a par with the SAF, with which it is in often visible rivalry. The fact that the RSF runs its own commercial companies but is not a party to the March 17 agreement may additionally complicate its implementation.
Military divestment is therefore hostage to a political timeline that is highly charged and especially tight, and the military may feel encouraged to stall in the hope of evading it altogether. The evidence is mixed. On one hand, according to then minister of finance Ibrahim al-Badawi, the officers running the SAF’s manufacturing and economic arm, the Defense Industries Corporation, proposed a major restructuring in June 2020 that would bring their civilian counterparts into a joint management structure.1 But two months later, on the other hand, Burhan and Lieutenant General Yasser al-‘Ata, then head of the Empowerment Elimination Committee, publicly opposed military divestment. Instead, ‘Ata proposed what he called “smart partnerships” with banks and the private sector and complementarity with the civilian sector. Furthermore, both the SAF and the RSF have exploited the interim period to expand their business activities.
What Is at Stake, and Why Now?
The stakes are high. The Defense Industries System (DIS), which comes under the authority of the Defense Ministry, had over 200 companies in May 2020, with annual revenues of 110 billion Sudanese pounds ($2 billion at the official exchange rate at that time). RSF companies bring the total to some 250 companies, but the RSF has also earned significant sums from hiring out troops to fight alongside Emirati- and Saudi-backed forces in Yemen (as has the SAF) and Libya. Its contribution of just over $1 billion to the Central Bank of Sudan to support essential imports in 2019 gave a sense of the volume of the RSF’s reserves.
According to the comprehensive review by researcher and political analyst Jean-Baptiste Gallopin and to the Human Security Baseline Assessment for Sudan and South Sudan, military companies are involved in the production and sale of gold and other minerals, marble, leather, livestock, and gum Arabic. They are also involved in the import trade—including controlling a reported 60 percent of the wheat market—telecommunications, banking, water distribution, contracting, construction, real estate development, aviation, transport, tourism facilities, and the manufacture of household appliances, piping, pharmaceuticals, detergents, and textiles.
The stakes for the country’s public finances and economy are equally high. Sudan is deemed to be “in debt distress,” with a foreign debt of $60 billion and total public debt reaching 202 percent of GDP in 2019. The transitional council of ministers announced an emergency rescue plan in September 2019 to ensure the supply of basic commodities and shore up the national currency, which was suffering what it called “systematic vandalism.” It also sought to raise tax revenues and reduce the financial burden on the state treasury. Exactly one year later, faced with a constant decline in the pound’s value, foreign exchange reserves sufficient for only nine days of imports, a current account deficit of $1.1 billion, and a doubling of the inflation rate in a mere six months to 166.8 percent, the council of ministers declared an economic state of emergency.
It was in this critical context that the U.S. Sudan Democratic Transition, Accountability, and Fiscal Transparency Act (SDTAFTA) came into force on January 1, 2021. This required that the Sudanese authorities establish civilian control over the finances and assets of the security (encompassing the military) and intelligence agencies, end their illicit trade in mineral resources, and, crucially, transfer “all shareholdings in all public and private companies held or managed by the security and intelligence services” to the Finance Ministry or other relevant government entities accountable to civilian authority.
The United States further enabled crucial access to international financial assistance and multilateral loans by lifting its designation of Sudan as a state sponsor of terrorism on December 14, 2020. The announcement emboldened Prime Minister Abdullah Hamdok to renew the demand for an end to military commercial activity, which he deemed “unacceptable.” As noted previously, the DIS had already proposed a significant change in its ownership and management structure to the council of ministers in midyear, but the latest U.S. announcement appears to have convinced Burhan and other senior military figures to reach a formal agreement on divestment sooner rather than later, possibly to pre-empt direct pressure from the incoming administration of President Joseph Biden. According to an informed source, U.S. defense officials have raised the subject of military companies with SAF counterparts. Coming in the immediate wake of the normalization of relations with Israel and the visit by an official Israeli delegation to DIS defense companies in November 2020, this may have reinforced the perception that resolving the status of DIS companies had become politically expedient.
The First Hurdle: Financial Disclosure
Full financial disclosure is the first prerequisite if military divestment is to succeed. At a minimum, it is critical to identify whether military companies are as commercially viable as touted, thereby avoiding the perception if they fail that transferring them to civilian hands caused their failure. Initial steps in Sudan were not encouraging. In April 2020, the DIS promised to open its books as part of a comprehensive government review. It gave government ministers an unprecedented presentation of its businesses in May, but did not share financial data with the Finance Ministry. Speaking in August, Hamdok complained that 80 percent of military-controlled companies were “outside the jurisdiction” of the ministry, which could moreover account for only 18 percent of their revenue.
Opening DIS books is necessary to check if its companies have uncleared debts and arrears, engaged in hidden or informal profit-taking, or privileged favored suppliers and subcontractors. Indeed, full budget transparency and disclosure of offshore financial assets held by all military and security agencies were conditions set by the SDTAFTA. This could be interpreted to include not just the accounts of the DIS, but reserve funds of the SAF as well. However, the SAF is highly unlikely to submit to a civilian audit even though its nonbudgetary assets were built up in part with DIS income and government subsidies. But it should at least be established whether monthly social security contributions are still levied from soldiers’ salaries to help finance the DIS. If confirmed, this levy should be reviewed and its future use scrutinized, since its justification relates to investment in a DIS that should undergo major divestment and restructuring.
As importantly, full disclosure will determine conclusively whether or not DIS companies pay taxes, customs duties, and other dues such as social insurance contributions for their employees. ‘Ata claimed in August 2020 that they had done so, while the deputy chief of staff for administration, Lieutenant General Munawwar Othman Naqd, claimed that they were “financially compliant” and “come under government review.” But Burhan’s offer to have military companies pay tax, which he proposed in December as an alternative to transferring them to civilian government control, raised some doubts about those claims. An official graph by the Finance Ministry reproduced by researcher Hamsa Hasan moreover shows that military companies enjoyed significant exemptions from customs and port fees for at least the five years up to 2019, and presumably far earlier.
Conducting a thorough financial review will take time, and cannot be rushed. But there is also a risk that the planned gradual transfer of military companies may enable the improper disposal of assets or profiteering by military networks, and make it harder to build a complete profile of their finances and past dealings.
Some local experts, such as economist Ahmed Mohamed al-Sheikh, claim that military companies have “a more advanced financial system than any state agency” and are subject to “more stringent audit” than their civilian counterparts. If this is true, then disclosure should be all the more straightforward, providing a robust means for early verification of DIS accounts and safeguarding its funds and assets pending completion of the divestment process.
The Second Hurdle: Civilian Capacity
The institutional capacity of the civilian public sector to take effective control of former military companies poses a separate challenge. Emerging from decades of authoritarian rule and the financial opacity and lack of public accountability that went with it, civilian agencies are unlikely to have the capability to undertake detailed forensic audits of the military companies slated for transfer in a timely manner. This is compounded by the potentially large number of military companies affected and by the considerable confusion over the number and proper ownership of their counterparts in the civilian public sector. Burhan claimed in August 2020, for example, that the SAF had tallied 450 nonmilitary state-owned enterprises and found that 220 of them lacked legal status. He also accused the council of ministers of failing to take action when this was brought to its attention.
Also unclear is the fate of military-owned companies that Bashir and his cronies transferred to themselves. The Empowerment Elimination Committee has stated that it is restoring around 120 civilian enterprises to government control. However, at least one military-owned company has been returned to the Defense Ministry, although as a civilian enterprise it should have been transferred to the public business sector, which is what the March 17 divestment agreement envisages. However, the public row that erupted over the Empowerment Elimination Committee and led to the February 2021 resignation of its head, ‘Ata, highlighted the challenges to its work, and may leave the fate of many companies and other assets in limbo.
Apparently in response to this crisis, Hamdok issued a decree establishing a Sudan Holding Company to Receive and Manage Recovered Assets. He moreover decreed that its board should be exclusively civilian, thereby asserting government authority over the recovery process. While this provides a legal structure to assemble and manage assets, it does not in itself resolve the question of whether or not the civil service has the capacity to see the process to a successful and timely conclusion.
These conditions may affect implementation of the military divestment agreement. This stipulates that defense-related companies belonging to the DIS will remain under military command, whereas its civilian businesses will be converted into public limited (shareholding) companies. The latter will come under the authority of two councils that have yet to be established—a council for economic development headed by the minister of industry and a council for funding and investment headed by the minister of finance—that will together manage funds, debts, and utilization. This makes good sense, but it may also set the stage for disagreement over which military companies come under each heading. Many of their counterparts in Egypt have dual defense and civilian roles, for example, greatly complicating the task of disentangling assets, separating accounts, and restructuring activities. As this will necessarily be a slow, gradual process, Sudan’s council of ministers will need at least to ensure that net revenues of the civilian companies belonging to the DIS will revert to the state treasury in the meantime.
A potential struggle also looms over whether or not civilian agencies should have the authority and access to audit companies designated as defense-related, evaluate their economic performance and the cost-effectiveness of their investment decisions, and dispose of their net incomes in conformity with practice for other publicly owned companies. Furthermore, in May 2020, then finance minister Badawi recommended reversing the balance of military to civilian production in DIS output from a ratio of 70:30 to 30:70. Whether the current ratio is actually 70:30 or not, his proposal for a substantial shift pointed to an additional area with the potential for major disagreement between a government keen to claw back and maximize revenue streams, and a military equally determined to preserve its own.
Conclusion: Hanging in the Balance
Despite the challenges, the March 17 military divestment agreement represents an important and unprecedented step in the right direction, not only for Sudan but also for other countries in the region. Most notable among these is Egypt, where the Defense Ministry, the Military Production Ministry, and related agencies run over seventy companies. These are engaged in the production of civilian goods and services for domestic and export markets and deliver public works and procurement on a massive scale, ensuring significant income streams that are retained and managed entirely by the military. Therefore, the prospect of sweeping military divestment so close to home is more than likely to be of concern to the Egyptian military. Success in Sudan would challenge its claims of spearheading economic growth and development and its justifications for wrapping the financial details of its commercial and civilian activities in total secrecy.
Of course, Sudanese military divestment may falter or fail if the SAF resists following through with the transfer of DIS companies, or if the RSF refuses to submit to a similar process. A paradox may arise: The income-generating practices of Hemedti, the remnants of the Bashir regime, and other groups are unsustainable given Sudan’s dire economic and financial situation, but this will probably not dissuade them from pursuing their current course.
As importantly, the practical details of the March 17 agreement still need to be hammered out, and this may reveal that the military interpretation of divestment has not in fact shifted substantially from proposals made in June 2020. At that time, according to then finance minister Badawi, the DIS envisaged that it would come under a supreme board headed by Burhan, which would oversee an executive board responsible for management and restructuring (chaired by the finance minister) and an investment board (chaired by the industry minister). This suggests that the SAF sought to retain considerable influence over the companies it hands over, although it appeared ready to subject the defense-related companies of the DIS to normal government audit, like civilian public companies, and that some of the civilian businesses could be privatized instead of joining the public business sector.
The behavior of external powers will have a major impact on how matters will unfold. Financial support from the United Arab Emirates and Saudi Arabia has enabled Hemedti’s bid for power and his financial maintenance strategy, but the United States has just demonstrated that the internal Sudanese balance can be tipped the other way too. For now at least, Burhan and the SAF appear to calculate that they are better off casting their lot with their civilian counterparts, so as to counteract Hemedti and the RSF. The U.S. administration, the European Union, and international financial institutions can make a critical difference. On the one hand they hold the key to new and considerable sources of external credit and assistance to Sudan, and therefore can help cement internal alliances that favor commitment to a democratic transition. On the other, the reassessment under Biden of U.S. relations with the Emirati and Saudi leaderships may sway them to relinquish their spoiler role and ease the path toward a civilian-led transition in Sudan, in an effort to reduce tensions with Washington.
The Sudanese military and the council of ministers have shown through the March 17 agreement that, for all their differences, they can work together to consolidate their country’s transition. External powers involved in Sudan should seize this tenuous but welcome opportunity, both to alter the wider incentive structure within which key Sudanese political actors approach military divestment and to provide technical assistance to ensure its success.
1 Email correspondence with Ibrahim al-Badawi, April 20, 2021.
