Egypt’s Sovereign Wealth Fund signed a cooperative agreement on February 3 with the National Service Projects Organization (NSPO). The NSPO is an apparatus affiliated with the armed forces that was established during the late President Anwar Sadat’s leadership to ensure self-sufficiency in the needs of the armed forces. It created surplus production in the local market, including construction, agriculture, food, and dairy. The NSPO also assisted economic development projects across the country, such as infrastructure and development projects in border provinces. Under President Abdel Fatah Al-Sisi, the NSPO’s powers have gradually expanded. The recent agreement is an attempt by the Egyptian Armed Forces to make NSPO’s assets more attractive to local and foreign invest ent and expand its ownership base by selecting economically successful companies affiliated with the NSPO and putting their shares for purchase on the stock exchange. Now, it is the biggest engine of the country's economy, participating in all aspects of life and competing with the private sector.
The cooperative agreement between the NSPO and the Sovereign Wealth Fund comes just two months after the Egyptian cabinet approved amendments to a state assets law. Sisi established this law, or Egypt Fund Law No. 177 of 2018, to develop the state’s resources. However, the fund opens the door for the exploitation of the assets and resources of the state, including closed or untapped government companies and factories that achieve low profits. The fund can sell these assets and properties to earn profit and attract investment. On December 26, 2018, the Council of Ministers approved amendments to the law, giving the president the right to transfer the ownership of any of the unexploited assets owned by the state to the fund. According to the decree’s text, no person is allowed to file claims for the invalidity of contracts concluded by the Fund. Courts are obligated not to accept these civil appeals or claims related to these disputes. The Fund has the right, by the president's decision, to own the company or factory with the newly-transferred ownership, and to sell it to any foreign investor without any difficulties. In other words, if the ownership of any government company is transferred to the fund, and then the fund sells the company to an investor or puts it on the stock exchange, no citizen has the right to dispute the outcome.
State media was quick to celebrate the February agreement, stressing that it is in the best interest of both real economic output and citizens. The deal attempts to stimulate stagnant capital and worsening stock markets, which reveal a loss of confidence in the regime. Such conditions are reflected in Egyptian investors and businessmen’s refusal to invest in their countries capital and companies. The agreement thus follows a large decline in investments and a severe increase in debt over the past few years, despite the painful, IMF-driven economic reforms implemented by the Egyptian Government which have yet to pay dividend. Egypt’s economic freefall has put the government in a precarious position. The Central Bank of Egypt (CBG) previously disclosed that Egypt saw a decline of roughly $1.8 billion in FDI and an inflation rate of 23 percent during the 2018-2019 fiscal year. Egypt received $5.9 billion in FDI for the 2018-2019 financial year, compared to $7.7 billion in FDI during the 2017-2018 financial year. Also according to CBG official reports, foreign debt has risen by $16.1 billion, reaching $108.7 billion at the end of June 2019. This reflects a 17.3 percent increase from the end of June 2018. This poor economic performance pressured the regime into rebuilding NSPO’s reputation, which has been tarnished by revelations of Egyptian contractor Mohammed Ali.
The agreement followed Sisi’s announcement—during the opening of the Medical and Industrial Gas Factory No. 3 of Al-Nasr Chemical Company in October 2019— to hold an initial public offering (IPO) for the military’s infrastructure and agricultural companies. According to the president, “these companies must enter the stock market and give Egyptians the opportunity to own stock in them. We are opening the door for a societal partnership...” Sisi’s statement came after Mohammed Ali began publishing a series of videos on social media—the first of which appeared on September 3, 2019 and received nearly 1.7 million views. The videos exposed instances of financial corruption and mismanagement of public funds across economic sectors, including the Engineering Agency of the Armed Forces, which involved in infrastructure projects around the country. The videos also revealed that Amlak Contracting, which is now owned by Sisi, has been working with the Armed Forces for the past 15 years. Muhammad Ali, who owned Amlack, was able to uncover facts of the military’s squandering of public funds as his company had several construction contracts with the military and possessed insider information of the government’s lucrative deals.
Ali’s videos and the light they shed on corruption within the military, pressuring Sisi to respond directly to the accusations leveled against the army. In an attempt to absolve the army from Ali’s accusations, Sisi stated, “I swear to God this is lies and slander…this is lies and slander. The Army is a closed institution that is very sensitive to any inappropriate behavior, especially when leadership is involved.” Sisi has sought to exonerate the military establishment by pushing for an IPO in full view for Egyptians and the private sector. However, Sisi’s suggested that IPO is facing obstacles that hinder its realization.
For a company to be listed on the stock exchange, it must fulfill a number of conditions—among them are disclosing the company’s capital, profits, sources of financing, expenditures, and tax history. While these conditions might be minor obstacles for companies under NSPO’s authority, no individual or institution has been able to pressure them to disclose this information. Officials often reject disclosing their finances by arguing on the basis of “national security,” although the companies’ work generally has no connection to military operations.
The military’s secretive economy is nothing new. For decades, the military’s economic activity has been operating with secrecy, with regard to its profits and the extent of its tax payments, the size of its investments, and its capital. Even more, no regulatory body has been able to challenge them, including the Central Auditing Organization (CAO)—the highest auditing authority in Egypt. During an official interview in 2012, Hisham Genena, former head of the CAO, explained the challenges to auditing military-owned companies that have no connection to national security and do not necessitate total secrecy. A notable example involves the armed forces renting out venues, for instance weddings halls, for large sums of money without any monitoring. Genena stated, “it is unacceptable that the CAO cannot monitor the wedding halls belonging to the armed forces. What is the connection between the military’s wedding halls and national security?”
In 2018, Sisi’s government also passed a “contracting law,” No. 182 of 2018, which allows the military and the military’s companies an exemption from oversight and auditing. It stipulates that executing contracts, without an option for public bidding, helps fulfill the goal of “protecting national security.” This means that government agencies, under the guise of national security, are able to obtain the company, investment, or plot of land without disclosing its price to external investors. The law ultimately allows these companies absolute secrecy in their purchasing, selling, and general profiting from contracts. This has led to a lack of transparency and, therefore, a lack of competition from the private sector. While these difficulties have persisted before 2018, the law solidified the inability to audit military-owned companies, ultimately making the practice illegal.
Under Sisi, the military economy has developed into a far-reaching organization. Military companies now operate in in the dairy, pharmaceutical, and transportation industries. According to the military’s spokesperson, Colonel Tamer Al-Rifai, they oversee 2300 projects with 5 million civil employees across the country in heavy and specialized industries, including agriculture, seafood, mining, general contracting, and infrastructure.
Sisi’s insistence on an IPO indicates his desire to repair the military’s reputation, and to clear it of accusations of corruption, misuse of public funds, and unaccountable control of state economy. Sisi also hopes to please the International Monetary Fund (IMF), which has voiced its concerns about military involvement in the economy. The IMF believes the military’s involvement creates unfair competition, potentially impeding new foreign and domestic investments. David Lipton, the IMF’s first Deputy Managing Director, expressed his reservations during an IMF delegation visit to Egypt to review the implementation of an economic reform package. Lipton was alarmed at the growth in work carried out by military companies under the guise of private ownership.
Through the IPO, Sisi hopes to send the message that all sectors of Egypt’s economy including industries in which the military has a monopoly and until now have been highly profitable—are now open to foreign investors. But despite the government’s persistent efforts to encourage investment, through the upcoming IPO, through regulatory reforms and a bold economic reform package, the external debt continues to accumulate. FDI is decreasing (by 23 percent between 2017 and 2018), and investors remain unwilling to the invest in Egyptian market. As such, the regime’s efforts to encourage investment are unlikely to bring greater transparency to the military’s involvement in the economy. Meanwhile, “the protection of national security” will remain the argument to justify any future policies the regime might pursue.
Mahmoud Khalid is an Egyptian journalist specializing in Arab and international affairs.