Special Report: From war room to boardroom. Military firms flourish in Sisi's Egypt

[May 16, 2018]  CAIRO (Reuters) - In a four-decade military career, Osama Abdel Meguid served in the first Gulf War and was an assistant military attaché in the United States.

These days he issues orders from an office that overlooks the Nile, as chairman of the Maadi Co. for Engineering Industries, owned by the Ministry of Military Production.

Maadi was founded in 1954 to manufacture grenade launchers, pistols and machine guns. In recent years the firm, which employs 1,400 people, has begun turning out greenhouses, medical devices, power equipment and gyms. It has plans for four new factories.

"There are so many projects we are working on," said Abdel Meguid, a 61-year-old engineer, listing orders including a 495 million Egyptian pound ($28 million) project for the Ministry of Electricity and an Algerian agricultural waste recycling contract worth $400,000.

Maadi is one of dozens of military-owned companies that have flourished since Abdel Fattah al-Sisi, a former armed forces chief, became president in 2014, a year after leading the military in ousting Islamist President Mohamed Mursi.

The military owns 51 percent of a firm that is developing a new $45 billion capital city 75 km east of Cairo. Another military-owned company is building Egypt's biggest cement plant. Other business interests range from fish farms to holiday resorts.
 

In interviews conducted over the course of a year, the chairmen of nine military-owned firms described how their businesses are expanding and discussed their plans for future growth. Figures from the Ministry of Military Production - one of three main bodies that oversee military firms - show that revenues at its firms are rising sharply. The ministry's figures and the chairmen's accounts give rare insight into the way the military is growing in economic influence.

Some Egyptian businessmen and foreign investors say they are unsettled by the military's push into civilian activities and complain about tax and other advantages granted to military-owned firms. The International Monetary Fund warned in Sept. 2017 that private sector development and job creation "might be hindered by involvement of entities under the Ministry of Defense."

Egypt's government counters that private companies are operating on an even playing field and that the military is filling gaps in the market, as it did during a shortage of infant formula in 2016. Then the military helped by importing supplies and has since announced plans to build a formula plant. Sisi says the military can deliver large, complicated projects faster than the private sector.

In 2016, the military and other security institutions were given exemptions in a new value-added tax (VAT) law enacted as part of IMF-inspired reforms. The law states that the military does not have to pay VAT on goods, equipment, machinery, services and raw materials needed for the purposes of armament, defense and national security.

The Ministry of Defense has the right to decide which goods and services qualify. Civilian businessmen complain that this can leave the system open to abuse. Receipts for a cup of coffee at private sector hotels, for example, add 14 percent VAT. Receipts at military hotels do not. Employees at the military-owned Al-Masah Hotel in Cairo told Reuters that no VAT was charged when renting venues for weddings and conferences.

Neither the Egyptian government nor the military responded to Reuters requests for comment for this article.

FROM GUNS TO GREENHOUSES

Military commercial ventures fall under one of three main bodies - the Ministry of Military Production, which oversees 20 businesses, the Ministry of Defense, which controls dozens, and the Egyptian government-owned Arab Organization for Industrialization, which has responsibility for at least 12.

Estimates vary on the scale of the military's role in the economy. Sisi said in Dec. 2016 the military accounts for up to two percent of output. "It has been said that the military's economy is worth 20 or even 50 percent of the economy. I wish," he said at the opening of a military facility to produce chlorine for water sanitation.

A leading political scientist, who asked not to be named, put the figure at about three percent of GDP. The World Bank estimated Egypt's GDP at $336 billion in 2016.

President Gamal Abdel Nasser established the Ministry of Military Production in 1954 to help Egypt achieve self sufficiency in arms production. In the decades that followed, its fortunes were mixed. It was abolished by Nasser, only to be revived by President Anwar Sadat in 1971, according to a 1985 CIA report. Revenues from its firms declined in much of the 1990s and 2000s. When Sisi took power the picture changed again.

The Ministry of Military Production is projecting that operating revenues from its 20 firms will reach 15 billion Egyptian pounds in 2018/2019, five times higher than in 2013/2014, according to a ministry chart. The ministry does not disclose what happens to the revenues. The chairmen of two of the firms said profits go to the ministry or are reinvested in the business.

The chairman of one firm that falls under the Ministry of Military Production, Major General Mammdouh Badawy, recalled with distaste the days of economic liberalization under President Hosni Mubarak in the 1990s and mid 2000s when "businessmen were eating up the country." Badawy's enterprise, Heliopolis Co. for Chemical Industries, was set up in 1949 to produce hand grenades, mortars, fuses and chemicals. These days it has ambitions to become Egypt's number one supplier of paint.

In 2017 Heliopolis teamed up with another Egyptian paint maker, Pachin, which is majority owned by the state. The two firms plan to work together to compete with the paint market leader, Norway's Jotun, Badawy said. Over time, Heliopolis aims to increase the share of paint production it sends to the private sector to 80 percent of its output from 20 percent now, he added.

"Pachin and I can compete with Jotun, but I can't compete with Jotun alone," said Badawy, a man of military bearing and with a greying moustache. "I don't want to be a local shop. I want to be a company that has the capacity to export and compete internationally."

Jotun said in a statement it hadn't seen "any influence on our business up to now." Its products were aimed at the top end of the market, it added, while Pachin tended to target middle and budget buyers.

The chairmen of two military engineering companies, Abu Zaabal Engineering Industries Co and Helwan Engineering Industries Co, said in recent years it had become much easier to access financing through the Ministry of Military Production.

In 2015 the government appointed Major General Mohamed El Assar to run the ministry. Assar was a member of the Supreme Council of the Armed Forces that ruled Egypt after a popular uprising toppled Mubarak in Feb. 2011.

Abu Zaabal chairman, Major General Magdy Shawky Abdel Moneim, said his firm used to have to borrow from the banks. "We had to wait for our turn at the bank to get the money we needed. But now, as soon as I submit a request to the ministry and say I need 60 million or 40 million Egyptian pounds to buy such and such raw materials to manufacture such and such, the following day Major General Assar approves the request."

The ministry did not respond to a request for comment about the financial approval process.

Founded in 1974 to make artillery for the armed forces, Abu Zaabal now produces a wide range of specialty steels.

Helwan was established in 1954 to make metal components for heavy ammunition. In the 1980s it began making cooking pots, cutlery, fire extinguishers and gas canisters. Its chairman, Major General Shokry Al-Qamary, said sales of kitchen utensils were booming since Egypt devalued its currency in 2016, pushing up the price of imported goods. "We can't keep up with demand."

Egyptian President Abdel Fattah al-Sisi attends a military ceremony in the courtyard of the Hotel des Invalides in Paris, France, November 26, 2014. REUTERS/Charles Platiau/File Photo

One of the most visible symbols of the military's commercial ambitions is in the city of Beni Suef, at the edge of the desert south of Cairo, where workers are putting the finishing touches to Egypt's largest cement plant, owned by the military's El Arish Cement Co. The cement industry is feeling the full force of the military's expanding activities. It took 8,000 workers 18 months to build the $1 billion dollar plant. At full capacity, it will produce 12.6 million tons of cement a year.

An executive at a foreign-owned cement company said Egypt's annual production capacity already stood at 79 million tons last year, far above consumption of 52 million. An official at an Egyptian company said his firm's sales had dropped by a fifth since January because of the new plant.

Egypt's majority state-owned National Cement Co. shut production in Nov. 2017 after suffering heavy losses in the second half. Suez Cement, majority owned by Germany's Heidelberg, reported that its consolidated 2017 loss nearly doubled to 1.14 billion pounds, while Alexandria Cement, majority owned by Greece's Titan, reported its consolidated loss rose tenfold to 513.9 million pounds.

The military did not respond to a request for comment about the cement market. It has said previously that housing and other major construction projects will create new demand for cement. In addition to the new capital, the military is involved in the development of two new cities - New Alamein on the Mediterranean coast and Gabal Galala in the mountains above the northern Red Sea.

The executive at a foreign-owned firm disagreed with the military's demand projection. To absorb all the new capacity Egypt, already one of the world's highest per capita cement consumers, would have to double its consumption, the executive said.

Among projects the Ministry of Military Production announced in 2017 was a plan to plant 20 million palm trees with an Emirati company and build a factory to make sugar from their dates. It agreed with a Saudi company to jointly manufacture elevators. The military inaugurated the Middle East's biggest fish farm on the Nile Delta east of Alexandria.

The Ministry of Military Production signed a memorandum of understanding with China's GCL Group last week to build a solar panel factory worth up to $2 billion. The military has taken over much of the construction of intercity roads from the Ministry of Transport and now controls the toll stations along most major highways.

"IT IS COMPETITION"

Egypt's economy has been struggling ever since the popular uprising that toppled Mubarak in 2011. Political instability and Islamist violence have damaged Egypt's crucial tourism industry.

Economists and investors say reforms tied to a $12 billion three-year IMF program signed in Nov. 2016 should lay the ground for economic expansion. But foreign investors are still shying away from Egypt, apart from those focusing on the more resilient energy sector. Non-oil foreign direct investment fell to about $3 billion in 2017 from $4.7 billion in 2016, according to Reuters calculations based on central bank statistics.

A commercial officer at a Western embassy said foreign investors were reluctant to invest in sectors where the military is expanding or in one they might enter, worried that competing against the military with its special privileges could expose their investment to risk. If an investor had a business dispute with the military, the commercial officer said, there was no point in taking it to arbitration. "You just leave the country," he said.

Other economists, however, are less troubled by the military's expanding role.

"The government is simply securing its interest in strategic sectors, and the way it's done is far from the mandatory partnerships or nationalizations of the 1960s. The government is determined to have private sector-led growth," said Hany Farahat, senior economist at Egyptian investment bank CI Capital.

Minister of Military Production Minister Assar told Reuters Egypt needs private companies, which he considers "the backbone of our industry and economy." But he believes his ministry also has a place. "It is competition."

Sisi, speaking at a Feb. 8 inauguration of 1,300 greenhouses built by military engineers, said the armed forces were invaluable for the economy.

"I will tell you simply, as you have seen, it would take the private sector three to four years to complete the executive procedures to do something this big, such as roads and water projects, and to this standard."

Egypt's military, the biggest in the Arab world, has advantages.

It enjoys financial support from Saudi Arabia and the United Arab Emirates, staunch supporters of Sisi since he toppled the group they see as a threat to the Middle East, the Muslim Brotherhood. Western powers see Cairo as a bulwark against Islamist militancy. Egypt receives $1.3 billion in military aid annually from the United States alone.

In addition to the law exempting the military from value added tax, some of Egypt's other laws also work to the military's advantage.

In 2015, the defense minister issued a decree exempting nearly 600 hotels, resorts and other properties owned by the military from real estate taxes.

Military companies receive an exemption from import tariffs under a 1986 law and from income taxes under a 2005 law. Cargoes sent to military companies do not have to be inspected.

It's not just the military's big ventures that are making some private sector companies uneasy. The Military Production Company for Projects, Engineering Investments and General Supplies grew out of a team of five employees in a small office in the Ministry of Military Production back in 2012. A ministry decree established the company in 2015. There are now 70 staff working in its new headquarters in the Nasr City area in northern Cairo, home to many military officers.

The company is striking deals with the ministries of education and youth and is involved in sewage and irrigation projects. It built a swimming pool for a leading sports club, is developing railways, constructed more than 60 schools and has built offices for organizations connected to Al Azhar, Egypt's top religious institution.

"The ministries deal with us because they trust the armed forces. We will deliver on time, prices are not exaggerated and quality is high," said company chairman Maged El Serty, who aims to build concrete and asphalt mixing plants to aid expansion.

At bustling Cairo squares, people line up to buy subsidized meat and other food handed out from trucks sponsored by the military. Sisi said he had instructed the military to enter the market "to supply more chicken to push down prices."

Some disagree with such measures on the grounds the military's mission is to protect the country from external threats.

"We have reached a point where they are competing even with street vendors," said Hazem Hosny, a political scientist and economist at Cairo University and spokesman for retired general Sami Anan, who briefly sought to compete in Egypt's 2018 presidential election.

"I believe that any military officer who respects himself will be upset from seeing even one soldier standing on the street selling chicken legs."

(Edited by Janet McBride and Michael Georgy)

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