Will the Egyptian Economy Benefit from Floating National Companies?

Egyptian President Abdel-Fattah El-Sisi speaks during the Egyptian Family Iftar banquet, taken on Tuesday 26 April, 2022.

The Egyptian government has signaled its intention to press ahead with seismic plans to sell off huge stakes in key national enterprises, including those run by the country’s powerful military, in the country’s biggest industrial shake-up in decades.

Tentative deals with foreign investors worth more than $30 billion have already been announced in the weeks since Egypt’s Prime Minister Mostafa Madbouly unveiled his plan for liberalizing the economy, under heavy criticism from socialist members of parliament.

Under the scheme, the Cairo government will shrink its involvement in a move that will officials think will beckon the private sector to invest, injecting much needed capital, as the impact of war in Ukraine continues to bite.

With inflation at 13 percent, Egypt’s position as the world's biggest importer of Ukrainian and Russian wheat has further contributed to rocketing food import costs, compounding the economic problems of recent years, during which time ministers have overseen significant capital flight, after investors moved so-called ‘hot money’ out of the country following periods of turmoil.

Madbouly now hopes that some of this private money will be tempted back into Egypt by the offer of lucrative industrial once-in-a-generation opportunities across the country. Officials think their macroeconomic reforms could yield foreign investments of up to $40 billion over the next four years.

 

A general view for the site of the futuristic, iconic tower skyscraper, in the business district, which is being built by China State Construction Engineering Corp (CSCEC) in the New Administrative Capital (NAC) east of Cairo, Egypt March 8, 2021. (REUTERS/Mohamed Abd El Ghany)

 

Benefits of the plan are long-term in nature, but in the short-term they may also help alleviate the economic impact of Russia’s invasion, the Egyptian government having already managed to strike trade deals for basic food commodities with other countries, avoiding - to a large extent - the supply chain disruption seen elsewhere as a result of the fighting.

Yet in a state known for its addiction to the public sector, analysts think decentralizing Egypt’s macroeconomic system will be far from easy, even if its laudable aim is the modernization of the Egyptian economy.

There are signs that the shift is real, however. After years of trying and failing to run the country’s precious national assets while lacking the skills to do so, officials have not limited their floatation plans to state-owned companies. That military-owned enterprises are also included suggests that the changes are wholesale.

Presidential Vision

The state’s planned departure from much of the market was announced in a milestone speech following the presidential iftar in April, with Egyptian President Abdel Fattah El-Sisi ordering the government to start working on “listing the companies owned by the Egyptian Armed Forces on the Egyptian stock market before the end of this year.”

He said this was about fixing chronic flaws in the Egyptian economy and noted three primary aims. The first was to reduce the budget deficit and narrow the gap between the national debt and the Gross Domestic Product (GDP). The second was to strengthen the role of the private sector, especially in industry, through incentives in the areas such as taxation, infrastructure, and facilities. The third was to expand the size of the Egyptian stock market (EGX) by listing more companies on it, with a view to attracting new investment. This is where the inclusion of military-owned companies comes in.

Contrary to popular opinion, the Egyptian president’s decision to float military-owned companies is not new, nor is it motivated solely by recent global crises such as the COVID-19 pandemic or the war in Ukraine. The first time President El-Sisi voiced the idea was in October 2019, during a visit to a military-owned medical facility, when he said “the companies of the Armed Forces ought to have an opportunity in the offerings made by the government… These companies must be listed on the stock market to give Egyptians the opportunity to acquire shares in them”.

In 2020, the Sovereign Fund of Egypt (SFE) went further, by confirming that military-owned stocks - to be listed on the EGX - would not be sold exclusively to Egyptians. Rather, the SFE said it would use economically-viable projects of the armed forces’ largest commercial enterprise – the National Services Projects Organization (NSPO) – to attract foreign investors. Up to 100% of the trading stock would be offered.

 

Major turnaround. Egyptian soldiers walk in front of a newly-constructed combined-cycle power stations on the outskirts of Cairo. (AFP)

 

As per an agreement signed between the SFE and the armed forces in February 2020, the sovereign fund is the guaranteed intermediary to the initial public offerings (IPOs) of the NSPO. The first of these IPOs would likely have happened by now, analysts say, had it not been for the pandemic.

This great opening-up of state-owned stock has been greeted with applause by Egypt’s business owners, who have repeatedly called for a level playing field, citing their inability to compete with state-backed military-owned companies in sectors such as construction and food. Likewise, the country’s political elite has also welcomed the change, in part because it promotes the concept of “civilian control of the armed forces” – an essential step in the process of democratization.

That said, sections of the Egyptian public have greeted the news with unease. Commentators suggested that it may have stirred unwelcome memories of the controversy caused by attempts to subjugate the military economy to civilian parliamentary control in the aftermath of the Arab Spring in 2011.

Concerns about the pace of change are also valid. Floating the armed forces’ commercial enterprises sounds like an ideal step in the right direction, but there are fears that it has the potential to do more harm than good. At risk could be the coherence of the nation state itself.

Ending or significantly weakening the military’s involvement in the economy before the building blocks of a stable democracy have been put in place may be a classic case of ‘jumping the gun’. To liberalize an economy without the infrastructure needed for that liberalization could serve only to jeopardize the political and economic foundations on which the state’s progress has been built.

Backbone of the Nation-State

The National Services Projects Organization (NSPO) supervises a group of companies that work in a wide range of sectors, from bottled water, to construction, to real estate. The NSPO has been described as the backbone of the autonomous military economic system, and the military economic system has been described as the backbone of the Egyptian nation-state.

The NSPO was founded in 1979, but it took off as a successful economic enterprise in the 1980s, when Field Marshal Abdel Halim Abu Ghazala became the minister of defense. Abu Ghazala was popular both with the military as well as with the public, in part because of his forward-thinking approach, embodied by his ambition to grow the military institutions, especially in areas such as armaments and national capacity-building.

 

At factory 909 on the outskirts of Cairo, above, military-owned Helwan Diesel Engines Co. turns out goods including engines, generators, fuel tanks and agricultural equipment. (Reuters/ Stringer)

 

The peace treaty signed between Egypt and Israel in 1979 allowed for billions of dollars in annual military aid to be sent to Egypt from the United States, and Abu Ghazala set about putting this to good use, growing the NSPO into the most successful project of the military economic system.

The autonomy enjoyed by the military institutions, together with the determination and discipline of the armed forces’ leadership hierarchy, kept the NSPO largely immune from the corruption that infected other areas under the Mubarak regime.

In 2012, when members of the parliament from the Muslim Brotherhood called for military-owned companies to be subjected to government supervision, they got a fierce response from the leadership of the Supreme Council of Armed Forces (SCAF).

In March of that year, the assistant minister of defense for financial affairs held a press conference to highlight the risk of surrendering control of the by-now successful military economic set-up to the civilian government, especially at a time of political instability following the revolution.

“The business of the [NSPO], which operates in several sectors, has grown from £E 11 million in 1979 to £E 644 million in 1990 to £E 6.3 billion in 2011, achieving net profits of £E 7.7 billion between 1990 and 2011,” he explained. “We will fight to protect our projects and not allow anybody to destroy the efforts that we have been sincerely dedicated to exerting for thirty years… We will not allow anyone to approach the projects of the armed forces.”

Over the years, this fed into concerns about the dominance of the military in the civilian economy, with some suggesting that the system had created “a state within the state”. Yet this appears to be inaccurate, not least because many of the claims have been based on unfair comparisons made between Egypt and western states with advanced democratic systems of governance.

Similarly, and as confirmed by the assistant minister of defense for financial affairs in 2012, military-owned companies pay taxes and intervene in the public market only during times of crisis. Likewise, its share of the national economy is not all-consuming. In 2018, President El-Sisi estimated the military’s involvement in the national economy at 2-3%. In a recent interview, the prime minister estimated it to be just over 1%.

Safety Net in Crises

The Egyptian economy – which comprises the government, the private sector, and the military institutions – has performed strongly since 2020, despite the pressures of the pandemic, and this would appear to offer partial proof that the independence of the military economy is crucial to preserving the coherence of the nation-state, particularly in the face of unforeseen crises.

By contrast, not only did private companies not support the government in managing the COVID crisis, they actively engaged in profiteering, including through the use of monopolies in areas such as medical and food supplies. This led the armed forces to intervene, through the NSPO, to assist the civil government throughout the crisis and break up the monopolies in food and drugs.

Afterwards, President El-Sisi made a point of thanking the NSPO in a meeting broadcast live on national television, during which he said the purpose of him visiting NSPO facilities that day was to “explore the readiness of the armed forces to assist the civil government in managing the crisis, and to assure Egyptians that there were ‘parallel arrangements’ ready to satisfy people’s needs”.

Yet Egyptian armed forces’ intervention in the face of economic challenge is not new. Indeed, the NSPO is currently facilitating the provision of food supplies following Russia’s invasion of Ukraine. Most prominent of all, perhaps, was its intervention following the Arab Spring revolution that ousted President Mubarak in 2011.

 

A construction site in Egypt's new administrative capital. (Khaled Desouki / AFP)

 

In the months that followed, the Supreme Council of Armed Forces (SCAF), which led the country in the post-Mubarak transitional phase, had the military support the state budget to the tune of nearly £E 2.5 billion and lend the Central Bank of Egypt $1 billion to enhance its foreign reserves.

When presenting the economic reform roadmap last month, the prime minister said the state’s dominance in national projects, mostly via military-owned institutions, was still necessary to keep the economy moving in the absence of the foreign investors who withdrew in the days following the removal of the Muslim Brotherhood regime in 2013.

 “From 2015-21, state-led national projects created more than five million jobs for Egyptian youth and re-empowered private sector companies by inviting them to act as contractors in these projects,” said Madbouly.

“That is not to say that these national projects are to be postponed or slowed. They remain a priority and we will continue working on them. They have proved to be of great importance to Egyptian citizens and are paving the way for the return of foreign investments.”

Far from appreciating the military’s role in enhancing Egypt’s economy, however, industrialists and some academics have blamed it for incompetency in the private sector, arguing that the armed forces’ enterprises rely on cheap labor from conscripted soldiers and avoid pay commercial taxes on sales, giving military-owned companies a comparative advantage over private businesses.

Careful Steps Forward

The counter argument is that military economy has always functioned as a kind of national safety net, particularly during times of political and economic turbulence. Keeping the military economy strong by maintaining its independence is, in this sense, crucial to ensuring a smooth transition from the existing economic system to the new and desirable model of a truly open market economy.

There are other concerns, as well. For instance, the safety checks needed to ensure that foreign investment will not expose the Egyptian armed forces to strategic vulnerabilities. For reasons such as this, the Egyptian state is now beginning to look at a possible middle ground that would enable it to proceed with market liberalization without exposing the military-economic structure to risk.

Last week, the director of the Sovereign Fund of Egypt (SFE) said it was creating a sub-fund dedicated to state-owned stocks, including those of military-owned companies, to be listed on the stock market.

 

“Factory 99” of Helwan Engineering Industries Co. in Cairo. Its chairman said sales of kitchen utensils were booming since Egypt devalued its currency in 2016, pushing up the price of imports. (REUTERS/Stringer)

 

In April, the SFE’s president said it had completed the legal reframing of two military-owned companies - the National Company for the Sale and Distribution of Petroleum Products (Wataniya), and the National Company for Producing Natural Water (Safi) - to list on the EGX before the summer. Both are successful and expected to be attractive to both local and foreign investors. The SFE is also working with the NSPO on the legal reframing of other companies to list on the EGX before the end of the year, as per President El-Sisi’s instructions.

The success of Wataniya and Safi listing, for the first time in the history of the Egyptian state, is essential for the success of the market liberalization plan that the government is fully determined to pursue and complete. It will also be a huge step towards untying one of the largest knots in the process of democratization.

 

* Dalia Ziada is an Egyptian author and Director of the Liberal Democracy Institute. Her work covers military affairs, political Islamism, and geopolitics in the Middle East and North Africa. Tweets at @daliaziada.


Related Articles