Carnegie Middle East Center on October 26, 2020 published an article written by Yezid Sayigh* under the title: “Egypt’s Military as the Spearhead of State Capitalism” as follows:
Summary: Egypt’s Abdel Fattah el-Sisi has reinvigorated state capitalism in Egypt through military-led real estate development, industrial hubs, extractive activities, private sector encroachment, and using private investment to recapitalize the public sector.
The Carnegie report “Owners of the Republic: An Anatomy of Egypt’s Military Economy” details how the involvement of the Egyptian Armed Forces (EAF) in the economy has undergone a transformation in scope and scale under President Abdel-Fattah el-Sisi. This is due partly to the military seizing power in 2013, but it also reflects Sisi’s lack of a clear economic blueprint, let alone a sound understanding of market dynamics. His overriding concern to generate capital while preserving the political regime is giving rise to a new version of Egyptian state capitalism.
Egyptian state capitalism version 1.0, labeled “Arab socialism” by its founder then-president Gamal Abdel-Nasser in 1961, gave way to version 2.0 after 1991, characterized by crony partnerships with private capital under former president Hosni Mubarak. Sisi’s version seeks both to reclaim the state’s centrality in economic decision-making and to bend the private sector to its capital investment strategy, even while continuing to profess official commitment to a free market economy.
The transformation in the military’s economic and commercial activity under Sisi reveals the contours of this evolution. The military claims to employ 5 million people, but virtually all are in fact employed by private subcontractors working for the military. This indicates that Sisi’s approach may help generate economic growth and improve the efficiency of public finances, but also reinforces the grip of the Egyptian state rather than consolidating a free market economy.
STATE CAPITALISM 3.0
State capitalism, where a degree of government ownership and control modifies private capitalism, never went away in Egypt despite two main waves of privatization since 1991. Khalid Ikram, former director of the World Bank’s Egypt department, has observed that government intervention in many economic sectors is so widespread that it virtually determines output, even though these sectors formally are in the hands of private decisionmakers. The state’s economic role is even more extensive than indicated by traditional criteria such as the ratio of government expenditure to gross domestic product (GDP).
The net value of military businesses and production of goods and services is far smaller than many portray, but it is considerably greater than it was a decade ago. The growth in discretionary funds allows the Ministry of Defense (MOD) to increase fringe benefits and cement loyalty among the rank and file, build a war chest to bankroll the development of military infrastructure and arms acquisitions, and make politically targeted media acquisitions and donations to bodies such as Tahya Misr (Long Live Egypt), Sisi’s pet social welfare and development fund.
The expansion of military economic activity in five areas serves the Sisi administration’s evolving version of state capitalism: real estate development, creation of industrial and transport hubs, natural resource extraction, relations with the private sector, and capitalizing the public sector with private investment. The first three areas reproduce aspects of the rentier economy under former president Hosni Mubarak, but the latter two constitute a more substantive shift. Sisi’s approach does not reflect an integrated strategy, but rather a determination to generate capital using the concentrated power of the state, spearheaded by the military.
REPRODUCTION AND REVISION
Sisi has invested massive state resources in creating real estate to generate revenue, drive economic growth, and attract private investors. This effort includes construction of three smart cities, so called because they use digital technology to improve energy efficiency. These cities target upper-middle-class customers with beachfront luxury housing that mimics the Dubai model. Other urban projects target less wealthy middle-class families, and still others workers in new industrial zones. The exact cost of these urban schemes is unclear, but they are part of the huge tranche of national projects that received 4 trillion Egyptian pounds (over $200 billion) in government funding in 2014‒2019. By January 2020, the first phase of the new administrative capital had absorbed nearly 10 percent of total spending (300 billion Egyptian pounds, or $19.05 billion), with a projected five-year price tag of $58 billion by 2022.
The sheer scale of national projects under Sisi sets him apart, as does the attempt to steer real estate from being a speculative free-for-all to a large investment gamble where the state is the principal shareholder. Demand for apartments in the new beachfront cities appears high, but with a shrinking middle class and few non-native customers, it is unclear that the state will indeed recoup costs. The president openly disdains economic feasibility studies and needs to purchase the loyalty of the state institutions that constitute the governing coalition he heads. So the military presses ahead with schemes such as the new administrative capital, even though it does not know how to supply water for the 7 million inhabitants it is designed to host.
The military business spearhead also aims to create major industrial, transport, and service hubs, concentrated in the Suez Canal zone and along the Red Sea coast. The EAF regards the Suez Canal and Sinai Peninsula as supremely important for national defense and treats both as its exclusive economic preserve. Half of the 600 billion Egyptian pounds (nearly $40 billion) spent by the government on development in Sinai by April 2020 had been administered by military agencies, including the National Service Projects Organization (NSPO), a Ministry of Defense affiliate.
Investing in basic infrastructure in this zone makes economic sense by signaling determination to attract business, but civilian ministers and senior civil servants take a back seat to the MOD and other bodies nominally under government control but that in reality work more closely with the military and the president. It would have made considerably more sense for these megaprojects to be preceded by pilot schemes to test investor appetite, allow adaptation, and assess environmental impacts. Presenting new development hubs as a means of tackling unemployment in impoverished areas, as Sisi has claimed, also ignores that they can succeed only by drawing skilled labor away from those areas, impoverishing them still further.
The scale of real estate and infrastructure projects underlines the importance of MOD control over the use of all state land, estimated to encompass 90‒95 percent of Egypt’s total surface area. This is one of the greatest impediments to private sector activity, but the Egyptian authorities resist reform. Sisi has also granted the MOD full economic usufruct over twenty-one intercity highways and a 4-kilometer-wide strip alongside them, enabling it to charge tolls, run or award commercial franchises (including for roadside services and advertising), and lay and monitor telecommunications networks (including fiber optic cable). Offenses, accidents, or business disputes occurring on or relating to these roads come under the jurisdiction of military courts, as is the case for all military zones and facilities.
The intensification of rentier activity highlights how state agencies drive home natural resource advantages over the private sector. The NSPO has undertaken greenhouse cultivation and fish farming projects in densely populated areas since 2014, using military conscripts as labor in what is supposedly a free market economy. The military also enjoys unfettered access to water lifted from underground aquifers or transported by canal from Lake Nasser or the Nile, without regard to economic feasibility or environmental impact. Agribusinesses established in Egypt by Gulf investors are able, literally, to export water. NSPO fisheries are also major consumers of fresh water.
The focus on rentier activities has extended under Sisi to military involvement in natural resource extraction. Until 2014, military involvement mostly comprised the bribes and illegal fees demanded by EAF retirees (and civilian officials) working in local government departments to issue quarrying and mining licenses, but in 2015 a government decree required Ministry of Defense approval for extracting mineral wealth and empowered it to levy fees on all output at production sites. The ministry also received exclusive rights to the proceeds of extracting and processing raw materials from mines and quarries on military-controlled land.
Since then, the NSPO has built marble and granite plants with a production capacity greater than the country’s entire output, putting it in a potentially monopolistic position. It has acquired a majority stake in the public company that controls Egypt’s sole black sands site, producing heavy metals such as titanium and zirconium at an expected export value of $176 million annually. It has also acquired a stake in gold prospecting and expanded its role in producing and marketing phosphates and fertilizers. The overwhelming majority of extraction sites are in military-controlled zones, through which the military spearheads the state’s stake in these sectors and injects itself into external trade.
SUBORDINATING THE PRIVATE SECTOR
The Sisi administration has realigned its relations with the private sector. The state is the sole investor in public infrastructure and the source of a large share of the private sector’s turnover, especially for large and medium enterprises. The massive surge in public housing and infrastructure spending since late 2013 has amplified the centrality of political connections and nepotism in securing public contracts, with military agencies extracting greater than normal profit margins as a result.
The ambiguity of the legal and regulatory framework governing investment in ventures established jointly with military agencies or in strategic zones controlled by the MOD deters domestic companies from investing there. The military’s exemption from the jurisdiction of civilian courts means that business disputes involving it do not go to arbitration. Poor enforcement of contracts and concerns over the military’s tax advantages also discourage foreign companies from investing in Egypt.
In theory, state investment could allow venture capital to open up and develop new economic sectors, but Sisi has also berated private sector companies for failing to invest in Sinai, blithely overlooking obstacles to investment, the absence of consultation with them, and the lack of feasibility studies. Far from opening up new ground, military companies have expanded aggressively into tradable commodity sectors, inflicting severe losses on private producers and shifting market share to military companies. The military has justified its investment decisions in terms of breaking (nonexistent) monopolies and stabilizing supply and prices, but a more obvious factor is the prospect of an assured market for its output.
The Sisi administration seeks private sector investment, but exclusively on its own terms. It perceives generating income and providing commodities at affordable prices for select constituencies to be of overriding political importance, with state control of land, external trade, and natural resources leveraged to maximize these ends. For example, in 2019 Sisi placed land surrounding the major tourist destination of Hurghada and forty-seven Red Sea islands under military control. The minister of tourism later hinted at the justification, accusing private tourist companies of “not contributing a single [Egyptian] pound to support tourism.”
SUGARCOATING STATE CAPITALISM
The Sisi administration has shifted part of the burden of its focus on state-led, capital-intensive activities onto private investors. The government has considerably reduced spending on energy and food subsidies and public sector wages and brought down the ratio of nonperforming loans. Parliament also approved the sale of state-owned companies with losses exceeding half their capital. These measures have been insufficient to generate capital on the scale the president seeks, compelling the government to borrow and taking the public debt-to-GDP ratio to an elevated 90.3 percent by June 2019 and foreign debt to $112.7 billion by December.
Sisi has sought to attract injections of private sector capital into state-led projects. The prime minister boasted in 2015 that the new administrative capital would not cost the Egyptian state “a single millim,” as it would be financed by commercial funding in partnership with private companies and foreign investors. Concerns about project viability then prompted the pull out of major Emirati firms, suspension of a $3 billion Chinese loan, and the failure of talks over a $20 billion Chinese investment. By May 2019, at most 20 percent of investment had come from abroad. The military and presidency have had to coax and even coerce some of the country’s best known private real estate developers into investing in the new capital.
The Sovereign Fund of Egypt (Tharaa) has emerged as the president’s preferred vehicle to bring private investment into public entities and projects, while leaving the state in control. Established in 2018, it is supposed to be an accelerator to place select state assets under partial private control, but in the view of one market analyst, this makes it “a sovereign holding company” rather than a sovereign wealth fund.
The military is once again spearheading this approach. The Administrative Capital for Urban Development company has revealed that it will transfer ownership of assets worth 50 billion pounds to Tharaa, assuring its military stakeholders future dividends from real estate. In February 2020, Tharaa also agreed to include ten NSPO companies in a portfolio of assets for promotion and investment while excluding highly inefficient companies belonging to the Ministry of Military Production, suggesting that it is emerging as a device to solicit private investment in ways that maintain state control over assets and the opacity of their true finances.
A FAMILIAR SHELL GAME
Investment vehicles such as Tharaa do little to transform manufacturing, integrate technology, or upgrade services and increase commodity exports. Instead, Sisi’s version of state capitalism is a variation on a shell game: it transfers capital from the private sector to the state, and from both to institutions he establishes or favors—most prominently the Tahya Misr fund, Tharaa, and the military. This approach offers higher efficiency, but his administration remains unable to attract more than what the World Bank calls “sluggish” foreign direct investment. Directed mainly at the energy sector, leaving Egypt’s other productive sectors struggling, even this has declined sharply since 2017.
There is some potential for Egypt to move gradually, fitfully, and even inadvertently toward a situation in which maintaining a state-controlled economy becomes untenable. But for now, nothing that Sisi has done alters what the IMF 2019 report on Egypt described as “long-standing problems of weak governance, rent seeking, vulnerabilities to corruption, and the heavy presence of the state in the economy.” Without a fundamental break in this structuring of economic access and opportunity, Sisi and any successors in the presidency will remain perpetually vulnerable to competitive rent seeking between the state agencies his power depends on.
*Yezid Sayigh is a senior fellow at the Malcolm H. Kerr Carnegie Middle East Center in Beirut, where he leads the program on Civil-Military Relations in Arab States (CMRAS). His work focuses on the comparative political and economic roles of Arab armed forces and nonstate actors, the impact of war on states and societies, and the politics of post-conflict reconstruction and security sector transformation in Arab transitions, and authoritarian resurgence.