Military sway in Egypt's economy will grow
The role of the military in the economy has increased since 2011 and is likely to expand further
Two-thirds of parliamentarians yesterday endorsed President Abdel Fatah el-Sisi to run for a second presidential term. The election is scheduled to take place on March 26-28, with a second round on April 24 if needed. The final list of candidates will be announced on February 24. Although Sisi has not yet announced his candidacy, he is widely expected to run and to win a second term. Since he came to power in 2013, the military’s role in the economy has grown and foreign companies operating in the country are more likely to interact with the armed forces in business dealings.
What next
Foreign firms doing business in Egypt will have to deal with the army, particularly in the implementation of major infrastructure projects. A second term for Sisi will only serve to expand the military’s influence in the economy, as he will probably continue his policy of encouraging its involvement. This will increase the risk to investors of becoming entangled in unethical business conduct -- including potential collusion in human rights abuses, of which the military is often accused.
Subsidiary Impacts
- The military will be especially present in sectors generating quick cash returns such as retail, consumer goods and construction.
- Companies in dispute with the army or military-controlled companies will find it difficult to obtain a satisfactory resolution.
- Extensive due diligence on Egyptian partners, suppliers and other stakeholders would uncover connections to the military.
Analysis
Prior to the 2011 revolution, the military's economic interests were substantial but were limited to certain sectors such as some manufacturing, tourism and retail. Under former President Hosni Mubarak, there was a clear division between the military's and civilian government's spheres of control. Many companies could invest in Egypt with very little, if any, contact with the armed forces.
This is no longer the case. Most business opportunities in the country now involve the military in some way. Business and trade delegations visiting Egypt have to meet senior generals as a matter of course. Under Mubarak, such meetings were rare and only usually involved trade delegations with a specific interest in defence and security.
Growing influence
Sisi has deliberately invited the military to take a larger role in the economy so as to head off economic crises swiftly, at a time when he is under pressure to address the country's economic woes (see EGYPT: Inflation will cause more hardship - December 5, 2016). He has placed the management of major infrastructure projects, such as the Suez Canal expansion, under the army's control. The army will also project manage the construction of a new capital.
In addition, Sisi has called on the military to resolve economic shortfalls, such as a sugar shortage in 2016 and the shortage of hard currency until the currency float in November 2016. This increased economic role gives the armed forces access to finance and contributes to ensuring their loyalty to Sisi.
Building an empire
The military has built its economic empire on access to labour, land and energy. The exact size of the military is not published and is deemed a state secret, but by most estimates there are between 300,000 and 400,000 personnel in uniform, with twice that number in the reserves. Male conscription gives the military access to a supply of cheap labour.
Access to labour, land and energy underpins the military's economic expansion
Moreover, the military has first call on any undeveloped land. This gives it an advantage in developing new projects. It is also an area where foreign investors are most likely to have to interact with officers.
The military has benefitted from energy subsidies, as it is a major energy consumer through its business ventures. It has long resisted the removal of these subsidies, but accepted recent reforms due to the need for Egypt to meet requirements for external finance.
The military's role in projects and other business opportunities is not always clear, as it is often able to override civilian regulations or gain exemptions. This brings risks and compliance issues for foreign investors, particularly in large infrastructure projects but also in a range of other sectors.
Foreign companies often have to negotiate with and pay the army for access to land
Even where the military is not a direct participant in a project, it can extract value in charging for access to land (because it has first call) or by charging for the relocation of military facilities. Some energy projects involving large-scale construction have had to pay for the relocation of nearby military radar facilities, without any transparency on how the military have calculated the costs.
The military gains a particular business advantage as its companies are not subject to the same labour laws and regulations as civilian firms. Its business interests are held in a holding company known as the Arab Organisation for Industrialisation (AOI), which has a range of subsidiaries, including manufacturers of military equipment, consumer goods, retail and pharmaceuticals.
Workers in these companies, who are often civilians rather than enlisted personnel, do not have the same terms and conditions as employees of civilian state-owned companies or the private sector. For example, they do not have the same protections against dismissal and can be subject to military rather than civilian courts.
Impact on the economy
The overall impact of the increased military role in the economy is the creation of a crony capitalist system around the president. Sisi is using business opportunities to reward and maintain the loyalty of both serving and recently retired officers (see EGYPT: Military build-up aims at officers’ loyalty - February 27, 2017). The effect is to limit the space for civilian companies and particularly the private sector.
Egyptian business leaders report that they are reluctant to engage with military companies due to the asymmetry in power. The military applies pressure to degrade terms over time, can be slow to pay and has an overwhelming advantage if any dispute arises.
The growth of crony capitalism will have a negative impact on Egypt's attractiveness for foreign investors, especially from Europe and North America, who will have concerns about reputational and compliance risks as well as opportunities to obtain a reasonable return.
Such structural issues will hobble Egypt's economic development at a time when Cairo is desperate to improve its wider prospects (see EGYPT: Consumers face tough year despite gains - July 17, 2017)
