War room to boardroom: Military firms flourish in Sisi's Egypt

CAIRO : In a four-decade military career, Osama Abdel Meguid served in the first Gulf War and was an assistant military attaché in the...




CAIRO : 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.



“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.”

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.

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.

-Source: News Agency



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Local Glob: War room to boardroom: Military firms flourish in Sisi's Egypt
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