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Home , Egyptian Armed Forces, Egyptian Army, Sherif Ismail

Introduction

Stiftung Wissenschaft und Politik German Institute for International and Security Affairs

Egypt’s Armed Forces Cement Economic Power SWP Comments Military Business Expansion Impedes Structural Reforms Jessica Noll

Since toppling President in July 2013, the Egyptian military has succes- sively expanded its civil economic activities. This development has attracted growing criticism, above all in the private sector. The government responded in October 2016 by announcing that the armed forces would diminish their economic role over the coming two to three years. But strong market positions, established privileges and historically ingrained structures make it unlikely that this will actually occur. Instead the economic activities of the armed forces, for example in the food, energy and construction sectors, will continue to shape the Egyptian economy. Realisation of the structural reforms agreed with the IMF in November 2016 is more than doubtful under these circum- stances. Not least on those grounds, international donors should urge ’s leaders to curb the ’s privileges.

In early September 2016 a group of Egyp- trum of the military enterprises – every- tian mothers took to the streets of Cairo, thing from arms and electrical goods to protesting over a shortage of subsidised baby pasta – is regarded as a competitive threat. milk. While the police acted quickly to stop Besides Prime Minister Sherif Ismail, who the protests spreading, the military leader- announced that the military would wind ship addressed the problem. The armed down its economic involvement, President forces supplied additional “discounted” for- Abdel Fattah al-Sisi also made a conciliatory mula, according to an official spokesman, statement, claiming that military enter- in line with its duty to poorer citizens. prises represent no more than 2 percent Whereas state media celebrated the in- of Egyptian GDP. The figure seems rather tervention, there were dissenting voices implausible, considering the historic role of too. Especially representatives of the private the armed forces in the economy and their sector, which accounts for about 65 percent unprecedented expansion in recent years. of the total labour force (2014 figures), criti- Experts believe the true figure to be at least cised the economic influence of the armed ten times higher, although the lack of solid forces. The increasingly broad product spec- data makes reliable estimates impossible.

Jessica Noll is a PhD Fellow with the and Africa Research SWP Comments 5 February 2017

1 Expansion into the Civilian liberalisation. From the 1990s, and above Economy all in the 2000s, this led to growing com- The economic role of the petition between civilian and military dates back to the era following the coup enterprises, where the latter succeeded of 1952 and the subsequent presidency of in expanding both their product ranges (1956–1970), when and their international cooperation (for the armed forces began to see themselves example with the Arab Gulf states). The spearheading national development. Along- armed forces justified this expansion above side land reform, nationalisation lay at the all on the grounds that their control over heart of their policies. The old elites were products and prices benefited both the disempowered, while the military secured state and consumers. long-term sway over land use and public After playing a less salient political role enterprises. The doctrines of industrialisa- during the Mubarak years, the military tion through import substitution and devel- returned to prominence after the 2011 opment through large-scale projects also uprising and the toppling of Mubarak. originate from that era – and remain cur- The Supreme Council of the Armed Forces rent to this day. This centrally planned (SCAF) assumed power, and essentially re- approach typified the construction of the tained it after Mohamed Morsi was elected High Dam in the 1960s and 1970s president in June 2012. As well as opening and the expansion of the Canal in the way for then Defence Minister Sisi 2014/2015. (Tantawi’s successor) to take over as presi- Nasser’s successor Anwar al-Sadat dent, Morsi’s removal in summer 2013 also (1970–1981) initiated a policy of economic gave another boost to the economic expan- and political opening, under which the sion of the armed forces. General Moham- number of military men in high positions med al-Assar in particular has played a cen- of state decreased. The peace agreement tral role. He had served as assistant defence with in 1979, which secured US mili- minister under Tantawi, and was respon- tary aid for Cairo, represented another sible for external relations in SCAF from watershed. As well as developing Egypt’s 2011. Since President Sisi appointed Assar defence industries, the army’s business as minister of state in 2015, the Ministry of activities were subsequently expanded Military Production has been increasingly under the defence ministers Abdel Halim visibly expanding its portfolio. Most recently Abu Ghazala (1981–1989) and Mohammed it launched a “Made in Egypt” campaign Tantawi (1991–2012). Here the military promoting local (military) production as a relied on a multitude of conglomerates, means to reduce import dependency. which remain to this day under the control President Sisi also actively promotes of the Ministries of Defence and Military reliance on the armed forces as a motor of Production and are manged by retired national development. Under his presiden- generals. Within the military economy the cy the civil economic activities of the armed lines between civil and military production forces have seen successive expansion at the are blurred. The National Service Projects expense of both the state-owned and private Organisation (NSPO) founded in 1979 oper- sectors. This has been possible in the first ates primarily in the civil sphere and con- place because the armed forces have lever- centrates on food production, while the aged political power to further legalise their Arab Organisation of Industrialisation privileges. Military figures have also filled (AOI, established 1975) and the enterprises more political posts while the armed forces of the Ministry of Military Production pro- have expanded and consolidated coopera- duce both military and civilian goods. tion with other ministries and broadened Under President (1981– their responsibilities. In order to generate 2011) Cairo pursued a course of economic support for their efforts, they also promote

SWP Comments 5 February 2017

2 their business activities much more promi- The military has recently also expanded nently than before 2011, asserting that they its political influence in the field of food are working for the public good. Three cen- supply. In September 2016 -General tral sectors will be analysed in the following. Mohammed Ali al-Sheikh took charge of the Ministry of Supply, which is also responsi- ble for Egypt’s crucial wheat imports. As in Production and Supply of Food and other cases, the appointment of a military Basic Goods officer to a civilian post was presented not In recent years, lack of foreign currency only as a service to the common good, but and mismanagement have regularly led to also as a means to curtail rampant corrup- shortages of basic commodities, which the tion. The previous minister of supply faced military has been able to leverage for pub- – contested – accusations of corruption in licity and expansion of its own businesses. connection with the disappearance of wheat Most recently, in January 2017, the Egyp- stocks. And al-Sheikh’s successor, appointed tian government reacted to months-long in the February 2017 cabinet reshuffle, also drug shortages and price rises for those has career-related ties to the military. that remained available by granting the In the course of the transition, respon- armed forces a license to form a pharma- sibility for the smart card subsidy system ceutical company. Earlier, in November passed to the Ministry of Military Produc- 2016, soldiers supplied the population with tion. Since November 2016 the influential millions of food parcels after devaluation Minister of State Assar has therefore also of the by about 130 percent been responsible for the rationing system against the US dollar caused prices to spike that permits almost 90 percent of – in some cases by more than 40 percent to purchase subsidised food. in 2016 alone. Subsidised food parcels have repeatedly been offered whenever the sup- ply situation tightened; many of the prod- Energy ucts they contained came from military During the years following the 2011 up- sources. The army has also expanded its rising Egypt was plagued by energy short- own supermarket chain across the country, ages. In response, a vigorous electricity in particular in order to supply those living generation expansion programme has been below the national poverty line. According pursued. Despite reforms to facilitate pri- to official figures, that represents almost 28 vate investment, the state remains the most percent of the Egyptian population of more important actor – offering the armed forces than 90 million. opportunities to expand their business Supplying the population with food pro- operations in the energy sector too. In 2016 duced by the military is nothing new. In the Ministry of Military Production an- response to the so-called bread riots of nounced the establishment, in cooperation 1977, which broke out after President Sadat with the Ministries of Petroleum and Elec- cut subsidies and were ended by the mili- tricity, of a company to conduct the main- tary, the NSPO sold surplus goods to the tenance of state-owned power stations. The civilian population. This approach has also armed forces also appear to have acquired been used to cushion price fluctuations in a veto over oil and gas production, with the international wheat markets, which exploration and other ventures requiring have immediate repercussions because their prior approval. The military itself also Egypt remains reliant on wheat imports. holds stakes in state-owned energy com- In 2008 President Mubarak called on the panies, such as Tharwa Petroleum Company. armed forces to tackle a particularly severe And it is also involved as a general contrac- bread shortage by increasing production in tor in the expansion of coal- and gas-fired military bakeries. power stations, which is being ramped up

SWP Comments 5 February 2017

3 to meet rapidly rising demand. One exam- opment. The government is also relying on ple of this is the conversion of two power military participation in its ambitious plans stations by the Egyptian company Orascom to build a new capital east of Cairo by 2022. in 2016. The largest project of recent years was Military enterprises are also involved in the expansion. Within the space the production and installation of wind of just one year a second shipping lane was and solar power equipment. Despite its out- created and a stretch of the original chan- standing geographical prerequisites, renew- nel was deepened. Although numerous able energy still plays a very marginal role civilian firms participated in the project, in Egypt’s energy mix. That could well it was led by the military. The armed forces change, however. In July 2013 the Arab are also involved in developing the Suez Organisation of Industrialisation founded Canal Economic Zone into an international a company to manufacture components logistics hub, including the creation of for wind and solar power. And in summer industrial parks and port expansions. From 2015, in a joint venture with an Emirati the beginning, the project has also been firm, it opened a factory producing photo- overseen by the Suez Canal Authority, which voltaic modules. The AOI could face inter- is usually headed by a former naval com- nal competition within the military com- mander. plex from the Ministry of Military Produc- Here and in other projects, the armed tion, which in 2016 announced plans to forces have ensured that their influence build a solar panel manufacturing plant in and financial returns are not restricted to cooperation with the Ministry of Electricity the construction phase. Under Article 204 and Renewable Energy and the Ministry of of the 2014 constitution, military facilities International Cooperation; Chinese inves- and infrastructure are subject to military tors are reportedly also involved. jurisdiction, whose scope has been steadily But above all, the military is decisively expanded in recent years. For example, backing the push to bring nuclear power to President Sisi decreed in 2016 that roads Egypt. Despite experts’ concerns over safety built by the army were security-relevant, and profitability, Sisi’s government has been along with the adjacent land. This de facto negotiating with since 2015 over gave the armed forces permanent control construction of its first nuclear power. The of the land. The possibilities to generate armed forces were involved in talks over an revenue had already become obvious in (as yet unfinalised) agreement under which 2015, when private companies came into Russia would supply technical assistance conflict with the Defence Ministry over the and a loan of $25 billion. The military would distribution of advertising revenues from also supply components. hoardings installed beside the Cairo Ring Road on land claimed by the armed forces. Sisi’s decree could also secure the military Construction and lucrative locations for its petrol stations. Infrastructure Projects Participation in major development projects is especially prestigious for the armed forces. Political Calculations In recent years these are likely to have gen- In general the expansion of the military erated considerable – and absolutely opaque economy can be regarded as an ongoing – additional revenues. Since 2013 the Armed strategy to justify the size of the army. Given Forces Engineering Authority has completed that economically hard-pressed Egypt faces hundreds of government projects to the no acute external threats, it is hard to jus- tune of several billion Egyptian pounds: as tify maintaining the world’s tenth-largest well as roads and bridges, these encompass army with a strength of about 440,000. The social housing, hospitals and slum redevel- armed forces’ economic activities are there-

SWP Comments 5 February 2017

4 fore presented in the context of “national For example, the armed forces are able security”. Given that popular unrest, for to draw on recruits for cheap labour. No example in response to shortages, certainly reliable figures exist for the numbers of has the potential to turn against it, the conscripts working in the army’s factories, military has good reason to worry about nor what they earn. But one indication of internal security and an interest of its own low wage costs is found in a decree issued in providing affordable everyday needs in summer 2013, increasing monthly pay such as food and electricity. for recruits to about 250 Egyptian pounds Expanding its business operations also (about $36 at the 2013 exchange rate). offers the military possibilities to strengthen Control of construction land must also its control over the population. Via the generate substantial profits. A law of 1981 smart card system for subsidised food, grants the Defence Ministry authority to whose data is now gathered by the Ministry designate state-owned desert land for con- of Military Production, the armed forces struction projects. Other ministries and can ultimately decide who is to receive sub- agencies also share this task, but enjoy sidies. In recent years, moreover, the legal lesser status than the Defence Ministry or possibilities for prosecuting civilians before are required to coordinate with it – as in military tribunals have been expanded. the case of the National Centre for Planning These now have the authority to prosecute State Land Uses. In 1997 then President any violation touching on to the military or Mubarak also decreed that the armed forces its facilities. In future this could also apply may administer undeveloped non-agricul- to offences relating to smart cards for sub- tural land. As a result, investors planning sidised food. projects such as solar and wind power re- Intensified cooperation between the quire additional permits from the military. army and the private sector also creates Fiscal exemptions represent yet another structures of dependency. It has become competitive advantage. Military enterprises harder for private companies to win public pay no income, sales or import taxes. In contracts, as they can be underbid by the June 2015, Defence Minister Sedki Sobhi expanding military enterprises. If they want also exempted numerous military-owned to survive economically, firms are increas- properties – including hotels and super- ingly forced to cooperate with the armed markets, as well as housing – from property forces, with the latter clearly in the driving tax. Concurrently, in 2016 a 13 percent value- seat. added tax was imposed on transactions in the civilian sector, and at the same time the import tax on hundreds of products was in- Economic Self-interest creased, in some cases by up to 60 percent. As has been the case in the past, military Across the board the army’s revenues are actors justify their business activities on likely boosted by its ability to cover most of the basis of supposed benefits to society as its running costs out of the defence budget. a whole – for example asserting that low Neither parliament nor the public is in- prices for their products and projects ben- formed in any detail about how the defence efit both the population and the state bud- budget breaks down. According to news- get. Ultimately, however, they are likely paper reports, it increased by $1 billion pursuing their own economic interests. It is between fiscal years 2013/2014 and 2015/ impossible to make any serious estimate of 2016, to reach $5.4 billion – despite the their profit margins, or judge whether the country’s financial troubles. This further low prices actually benefit the state budget. underlines the political power of the mili- Given that such prices are only possible tary. because of extensive privileges, this repre- Moreover, annual US military aid of $1.3 sents an extreme distortion of competition. billion is estimated to cover up to 80 per-

SWP Comments 5 February 2017

5 cent of Egyptian weapons procurement. and encourage mismanagement, if not This has allowed the military to accumulate even corruption. The Administrative Con- immense financial reserves over the decades. trol Authority, which is officially respon- Sources close to the army put the sums in- sible for fighting corruption in the adminis- volved in the low tens of billions. Such tration, is itself traditionally headed by a assumptions are not unrealistic, given that former army officer. the armed forces lent the Egyptian central In fact, given that members of the armed bank $1 billion in 2011. forces also enjoy exclusive access to lucrative posts in the administration and various state authorities, they actually control the No Civilian Controls civil sphere, rather than vice versa. For dec- Historically, there has always been a lack of ades, former officers have occupied gover- civilian control over the military enterprises. norships and top administrative posts, for Since 2011 that situation has increasingly example in the aforementioned Suez Canal been codified in law. First and foremost, the Authority and the port and transport author- constitution of 2014 stipulates that only the ities. The number of such functionaries National Defence Council – whose members with military backgrounds has increased are largely military – may debate the defence yet further since President Sisi took office. budget. The fact that there is no significant dis- This means that the parliament elected cernible resistance to the army’s activities at the end of 2015 lacks any constitutional underlines its predominance in the state’s authority to operate as an instance of con- institutional structures. Egyptian civil trol. Moreover, for the first time in decades, society is powerless to change that. NGOs parliament again includes numerous mem- seeking to improve transparency and rule bers whose background is in the security of law have been systematically persecuted apparatus. For example, the chair of the and impeded in their work since Sisi took Defence and National Security Committee office. Nor can the media offer any correc- comes from the military intelligence ser- tion. Freedom of the press is heavily cur- vice. In this function he participates in tailed, and critical reporting on the mili- sessions of the National Defence Council tary subject to state censorship. discussing budget matters. Thus, another channel for civilian oversight is closed. At the same time, despite the fragmented party Outlook and Recommendations landscape, pro-regime forces secured a Despite the government’s insistence that majority in parliament, which has passed the military is doing no more than crisis pro-army legislation. For example, military management, the armed forces are unlikely pensions were raised in 2016, after they to withdraw from the Egyptian economy in had already been increased repeatedly since the foreseeable future. Examples like 2014. and Argentina demonstrate that pruning Neither the judiciary nor other civilian back military involvement in business organs possess the authority to investigate demands political willpower. President Sisi transgressions committed by the military. will continue to support his generals’ course At the latest since 2011 serving and retired of business expansion because he is heavily military personnel have been immune from reliant on their backing due to a lack of prosecution in the civilian justice system, democratic legitimacy. and may only be tried by military tribunals. In fact, the influence of the armed forces This protection also applies to the business in the Egyptian economy could increase activities of military actors, which on ac- further, contrary to the interests of inter- count of their classification as “security- national donors. In November 2016 Cairo relevant” are already completely opaque agreed a comprehensive economic package

SWP Comments 5 February 2017

6 with the IMF, in the context of a budget privileges of the . deficit of 12.1 percent and state debt reach- Otherwise support designed to encourage ing almost 100 percent of GDP in fiscal year economic development will be fruitless. 2015/2016. An IMF loan of $12 billion and and the European Union should funds from other donors including Germany also put more thought into ways to assist are designed to create space for reforms in the few civil society actors in Egypt, which the coming years and thus boost economic could potentially initiate a national discus- growth. The goals include increasing com- sion about civil-military relations and push petition and improving the climate for in- for a shift towards greater transparency. vestors – and hence also strengthening the The current climate of repression of critical private sector. civil society makes this extremely difficult. Yet the economic expansionism of the Especially in that context, concessions to armed forces threatens to keep Egypt’s pub- the Egyptian armed forces should only be lic sector contribution to GDP at its existing made when they in return contribute to im- level, if not to increase it. Other planned proving the human rights situation and the © Stiftung Wissenschaft und reforms are also at risk: the IMF programme treatment of civil society. Politik, 2017 seeks to liberalise the energy market, but All rights reserved military interests in this sector (described These Comments reflect above) are likely to hamper implementa- Further Reading the author’s views. tion. Efforts to create new jobs could also be SWP undermined, along with hopes of promot- Stephan Roll, “Managing Change: How Stiftung Wissenschaft und Politik ing the private sector by reducing bureau- Egypt’s Military Leadership Shaped German Institute for cracy, new investment legislation, more the Transformation”, Mediterranean International and Security Affairs transparent allocation of land and greater Politics (Special Issue “Dynamics of competition. Given that the armed forces Transformation, Elite Change and Ludwigkirchplatz 3−4 draw primarily on their own personnel to New Social Mobilization in the Arab 10719 Berlin Telephone +49 30 880 07-0 realise their projects, wide-ranging military World”) 21, no. 1 (2016) Fax +49 30 880 07-100 business activities will not necessarily www.swp-berlin.org [email protected] create the new jobs the country urgently Stephan Roll and Matthias Sailer, needs, with official unemployment at 27 Built on Sand: Egypt’s Questionable Strategy ISSN 1861-1761 percent among the under-30s. Moreover a for Growth and Development, SWP Com- Translation by Meredith Dale reduction in military-related bureaucracy ments 15/2015 (Berlin: Stiftung Wis- (English version of cannot be expected in the coming years. senschaft und Politik, March 2015) SWP-Aktuell 7/2017) Complicated military approval processes will continue to create costly delays in pri- Chérine Chams El-Dine, Fragile Alliances in vate investment projects. And the appoint- Egypt’s Post-Revolutionary Order. The Mili- ment of military officers to political offices tary and Its Partners, SWP Comments is unlikely to contribute to reducing cor- 46/2014 (Berlin: Stiftung Wissenschaft ruption or improving transparency, as und Politik, October 2014) demanded by international donors. The options for external donors to bring about a reduction in the economic power of the Egyptian military appear limited. But that does not mean that the matter should be ignored. Even if donors make their aid conditional, the army cannot be expected to withdraw completely from the Egyptian economy. However, in talks over financial aid they should still demand at least a reduction in the economic activities and

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