Egypt’s deep state gets back to business

Editor’s note: This piece is the second in a continuing series by The GroundTruth Project exploring the power of the Egyptian military. Read Part One, "Egypt's 'deep state' proves victorious," and Part Three, "How an argument over gasoline became a matter of national security in Egypt."

CAIRO — President Abdel Fatah al-Sisi was flanked by members of his government and the military as children wearing white caps emblazoned with the Egyptian flag crowded around a detonator.

The group’s hands piled on top of a large yellow button, Sisi grinned for the camera and they pressed down in unison. A series of timed explosions sent clouds of grey desert dust into the air as Egyptian Air Force pilots used their colorful afterburn to trace hearts in the sky over the Suez Canal Zone.

The event, which took place last August and was broadcast on all local television channels, signaled the official start to construction of a new Suez Canal parallel to the current one as part of a wider “grand national project” aiming to expand trade in the canal zone, building an international logistics and industrial hub there.

While Sisi reveled in the skywriting of a new economic hope for Egypt, former President Hosni Mubarak was still confined to a hospital bed in the military hospital where he was being held.

Ultimately, Mubarak would be cleared of all charges relating to the murder of more than 800 Arab Spring protesters in 2011, as well as alleged corruption throughout his 30-year rule.

The verdict hardly came as a surprise. It was the crowning moment of 18 months in which elements of the former regime regrouped and took back the country, the military ousting elected Islamist President Mohamed Morsi following mass protests against his rule.

A series of networks led by the military and including other security forces, the judiciary, senior bureaucrats and powerful businesses has always ruled Egypt. These elements, known as the “deep state,” predate Mubarak himself. The deep state barely faltered during Morsi’s brief tenure in power, with the former president preferring to placate the deep state rather than face it.

More from GlobalPost's partner, FRONTLINE: How Egypt's shadow state won out

Mubarak once sat atop the deep state, balancing the factions and sometimes playing them against each other to secure his rule. Now that balance is all but gone, with the military reigning supreme and the rest accepting their roles as followers.

“The ruling on Mubarak’s case is highly symbolic — but the greatest practical effect may be on the opposition to the authorities, rather than anything else. For those who were working for accountability, this is a slap in the face,” said Dr. H.A. Hellyer, a nonresident fellow at the Brookings Institution’s Centre for Middle East Policy.

Though Mubarak’s acquittal inspired protests, it also brought out glee in the local media, now increasingly unified in support of the current regime. Television host Ahmed Moussa, known for his close ties to the Mubarak regime, congratulated “Mr. President” on his release and called it “justice.” He went on to have the man himself phone into the show.

“I have committed absolutely nothing,” Mubarak said in his first and so far only media appearance since the verdict. “When I heard the initial ruling I laughed,” he said of the initial trial in June 2012 where he was found guilty and sentenced to life in prison.

Indeed, he had nothing to worry about. He served his time in a luxurious military hospital in Cairo’s affluent Maadi suburb, not a jail cell. The hospital, which serves civilians at great cost, is one of many manifestations of the deep state — which Sisi must now leverage to pry the economy out of its tailspin.

On that sunny day when he marked the groundbreaking ceremony for a new Suez Canal, Sisi knew he was in a footrace to achieve economic recovery, the only guarantee of his regime’s survival. The project will cost $4 billion and is expected to increase Egypt’s annual income from the canal from $5 billion to $13.5 billion by 2023, said Mohab Mamish, a former admiral and chief of the Egyptian Navy.

Mamish was hired by Morsi to govern the canal, continuing the tradition of awarding that position to retired navy men.

The new Suez development under Sisi has been awarded to a consortium led by the military in the form of the Armed Forces Engineering Authority. The president stressed in his speech that it would be implemented by “national companies” and financed by “national banks.”

Companies in the consortium include engineering firm Dar Al-Handasah and 18 others, according to a source at Dar Al-Handasah who declined to be named because he was not authorized to speak to the press.

“The military will build all of the infrastructure, all of the valves and digging and basically the parts that are meant to be top secret. We are not even allowed to look at the maps. We and the other companies will carry out the surrounding logistical hub and such projects,” he said.

Following mass protests against Morsi’s rule, Sisi as head of the Egyptian Armed Forces announced in July 2013 that he was ousting the president and dissolving the Islamist-dominated parliament. He promised constitutional amendments which were to be followed by parliamentary and then presidential elections.

Though a legislature was meant to be elected first, the presidential elections were moved forward. Sisi won in a landslide.

Parliamentary elections were promised to be held six months later. Instead the elections will take place between March 21 and May 9 over several stages.

Without an elected parliament, Sisi for the time being holds absolute executive and legislative power over the country, passing laws by decree. There is no civilian body, elected or otherwise, with oversight power of the military.

A new parliamentary election law returns the electoral system to the Mubarak-era system. It all but cancels political party lists, which now account for 20 percent of seats, paving the road for the return of big families and rich businessmen allied to the previous regime to make their return as lawmakers.

And a draft of a proposed law that would ban the publication of facts, figures and statistics about the military without prior approval was recently leaked to local press. The penalty for reporting on the military could be raised to a five-year prison sentence and a fine of up to $7,000.

This law would prohibit the last free elements in a largely compliant press corps from reporting the multimillion-dollar contracts the government awards the military directly, sidestepping any open bidding process. These include contracts to build and run bridges, housing projects, hospitals, schools and more. It would also stifle any independent reporting on defense spending.

Only recently has parliament gained the right to review the state’s defense budget, but even that is only in the form of one final number which also includes police spending.

This year the Egyptian state is spending EGP 30.9 billion, approximately $4.3 billion, on defense.

This does not include a United States annual military aid package worth $1.3 billion or the money the military makes through its business activities, according to Amr Adly, an Egyptian political economist and scholar at the Carnegie Middle East Center.

One estimation of the scale of the military economy in Egypt is that the military has taken to “donating” money to the state from the profit made through its private businesses to help the country’s ailing economy. This has totaled around EGP 8.6 billion (over $1.2 billion) since 2011, and EGP 1 billion (over $140 million) this year alone, according the Ministry of Defense.

Yet Egyptian military influence over the economy is visibly expanding following Sisi’s election. As the military becomes more deeply entwined with the economy, it becomes increasingly difficult to separate its power from that of the state.

The invisible hand within the market

Sisi was open about his desire to award major military projects as a way of boosting the economy even prior to his election. And the military was already party to such contracts long before June 2014..

An exhaustive review of issues of the Official Gazette, the state’s public record of all laws and contract awards, since Morsi’s ouster and up to August 2014, reveals the extent of this.
In February 2013, former Prime Minister Hazem al-Beblawi’s government awarded the National Service Products Organization (NSPO), part of the defense ministry, the rights to the Rod Al- Farag Corridor for 99 years.

The deal stipulated that NSPO would completely fund, build and maintain the project, which links several major highways in and around Cairo. In return, NSPO will have the exclusive right to levy and collect tolls, sell licenses for billboards and advertising and enjoy all other advantages of managing the project for the next century.

Interim President Adly Mansour, appointed by the military following Morsi’s ouster, issued a decree allowing the state to bypass bidding laws and award contracts directly “in case of emergency” and between late September and late November 2013 the government awarded the military over EGP 7 billion ($1 billion) in contracts.

The Beblawi government awarded NSPO in October a similar deal for the desert road linking Cairo and Alexandria, allowing it the same advantages for the next 50 years. Three months later the military increased heavy transport tolls on the highway by 800 percent.

The military expects to collect about $112 million annually for the next 50 years from the road, according to Egyptian road authority chairman Hassan Lasheen.

Beblawi’s government also awarded the military over EGP 4.7 billion ($660 million) in maintenance contracts for 27 roads and bridges, to be carried out by the Armed Forces Engineering Authority, EGP 2.7 billion ($380 million) in Sinai development contracts, and EGP 527 million ($73.7 million) in housing projects, also in the Sinai.

Then in December the Ministry of Local Development awarded development contracts to improve the sprawling slums of Cairo worth as much as EGP 2 billion ($280 million) to the military “to ensure they would be accomplished promptly and accurately,” according to local development minister Adel Labib, a former police major general.

The government went on to award the military almost $135 million worth of public work contracts this year, including contracts to build traffic lights, hospitals, schools, bridges, bakeries and government administrative buildings.

The military denies these projects are aimed at expanding its own economic influence, instead saying that most provide jobs for civilians and contribute to civilian economic growth.

When asked about the military’s influence over the economy, Assistant Defense Minister and former military attaché to Washington Major General Mohamed El-Keshky referred The GroundTruth Project to a high-level civilian government employee, Noha Bakr, whom he called a “dear friend.”

“The projects are implemented by civil subcontractors, with civilian employees, providing job opportunities to civilians, while the military as the main contractor has the role of monitoring and auditing the quality and time frame of the implementation,” said Bakr, the assistant to the Egyptian Minister of International Cooperation.

A business empire?

Today NSPO owns 11 companies that deal in making pasta, cooking oil and lard, raising cattle, agriculture, packaging of foodstuffs, bottling and distributing mineral water as well as owning and operating various gas stations, cement plants, a catering and security service as well as chemical and plastic plants.

No one outside the military can tell for sure how much it makes per year but according to NSPO’s closing financial statement in fiscal year 2012-13 its budget was about EGP 1.63 billion ($228 million) and it made over EGP 63 million ($8.8 million) in profit, profit that goes back into NSPO’s budget for the next year and not the state coffers.

Furthermore, NSPO is exempt from all taxes and tariffs, and draws on conscripted and very underpaid soldiers as cheap labor, thus giving it an unfair competitive edge in the market.

“Labor in military factories have full rights on all levels,” said Bakr.

When President Sisi announced he was cutting fuel subsidies in July, the military announced that NSPO food outlets would sell their products at a discount to counter the anticipated rise in the price of goods.

Much of the same goes for the Arab Organization for Industrialization (AOI), a state-owned defense company that represents another pillar of the deep state, along with the Ministry of Military Production (MMP), which focuses on weapons and defense products, providing the military with weapons and selling them to other countries.

“The turning point came at 1986,” said Ahmed Morsy, a research associate at the Carnegie Endowment for International Peace who researches the Egyptian military’s business activities. It was then that defense chief at the time, Field Marshal Abdel Halim Abu Ghazala, started touting the idea of selling the “surplus” produced by NSPO to civilian as part of the military’s “contribution” to public service.

Although AOI was originally started as a pan-Arab venture with Egypt, Qatar, Saudi Arabia and the United Arab Emirates to produce weapons for the region, the organization is now fully under Egypt’s control. AOI’s website boasts that alongside the rockets, missiles, aircraft engines, military vehicles and other weapon systems it produces in its 11 factories, it is also involved in civilian industries.

AOI runs and owns infrastructure projects such as water purification plants, sewage treatment plants, plastic and fiberglass products, railway coaches, vehicle outfitting, medical equipment and household appliances. It also is exempt from all taxes and tariffs and uses these advantages to flood the market with products like cheap televisions, computers and tablet devices.

Although in name it directly answers to the president, it is in fact subordinate to the Ministry of Defense and like NSPO does not undergo any outside auditing, from the government or otherwise. Its profits are deposited in a bank account that only the president, minister of defense and AOI chairman have access to.

“These factories are there mainly to fulfill military needs and to maintain it independence from market shortages or fluctuations, they supply the military with its needs and the surplus goes to the market to cover gaps,” said Bakr, adding that “the products of the military factories have not disturbed the market or affected free market rules.”

'Now it's just the army'

Increasing military involvement in the day-to-day workings of the economy is already visible on the streets of Cairo. Buses normally used to transport soldiers cruise the clogged roads in increasing numbers, after the military sidestepped a planned public transport workers strike in March 2014 by deploying its own fleet.

Staffing each bus are four military conscripts: one driving, one selling the cut-rate tickets and two from the military police brandishing automatic rifles in the name of security. The buses have only become more commonplace following the fuel subsidy cuts.

“Sisi is using the military because it’s what he as a career officer knows best,” says Yezid Sayigh, a senior associate at the Carnegie Middle East Center. In a country where the government is viewed as inefficient and the private sector as corrupt, the military becomes a “magic solution.”

Sisi’s election has thus ushered in an era where the military is being relied on to carry out the government and private sector’s task of economy building.

“In the army you press a button and things can happen. In contrast when it comes to the state machinery or private business, you have to negotiate. Nasser brought in the military because it was loyal and effective and Sisi is doing it for the same reasons,” he said.

Egyptian officials in Washington defended the military’s economic involvement, likening it to the decisions made in America following the Great Depression. The military simply supplements the areas that private business won’t touch, they argue.

But the military interferes even when the private sector is happy to take the lead. According to Sayigh it is standard practice for the military to appoint an “envoy” to private companies that effectively allows it to control bidding processes.

Still, he believes that while the Egyptian military economy “acts like a private business,” its civilian products have never had the market share to make it an empire.

What is happening now, Sayigh argues, is that the military is “moving on to bigger things” because now that it’s free of Mubarak, who “stood above the system.”

“Now for the first time it’s just the army,” Sayigh said.

The man who said no

Tanned from working outdoors, 28-year-old Amr Bassiouny smiles broadly as he walks through his greenhouse, stopping to pluck a few darkened leaves from a head of lettuce. The hydroponic system that he designed and built himself allows him to grow leafy green vegetables in a farm he runs without falling victim to Egypt's arid soil.

His system attracted military attention. In 2013, a former coworker from the Ministry of Planning told Bassiouny that Sisi's new economic reforms meant the military was looking to finance new projects. The military's pasta-making factories were public knowledge in Egypt, but now they wanted to expand their range, growing tomatoes for pasta sauce and strawberries for jam.

"The first round of discussions was great,” Bassiouny said. “I met with a guy who loved my hydroponic system, and told me they want to put one in every district. It seemed like this would be a nationwide thing. Then we had a meeting with a second guy, who just seemed to have a totally different agenda. He kept saying that there was money to do whatever we wanted, but I couldn't tell what he wanted from me."

Bassiouny asked if they wanted him to build the greenhouses.

"I told him that building them from wood saves 75 percent. He said this wasn't a problem, that acquiring steel frames from the same military-owned factories that produce airplane parts was the plan. I asked if he wanted me to provide labor. He said that wouldn't be necessary either, as the military already has subcontracted labor for these types of things."

In the end, Bassiouny was told that he could own a 49 percent share in the strawberry and tomato farms that used his hydroponic system because "the military has to be the boss of the business," and own 51 percent.

Why would anyone agree to a business deal that is so constrained?

"Influence," replies Bassiouny, "you might not be making a lot of money, but you are connected to the system. It presents opportunities for later on."

It's good to be the boss

To fully understand the military’s economic motivations we need to explore “the many identities of the military as an economic actor,” said the political economist Adly.

Informal networks within the military itself but also within the civil service and private sector shape the Egyptian economy. Retirement in the military is viewed as the first step towards a cushy civilian job which acts as a reward and a guarantor of loyalty, but also buys the institution influence.

Many of those who work in government land agencies are former officers coming from the military’s land use office, for example, Adly said.

“We don’t know anything about the power dynamics within. Military salaries have been doubled four times since the uprising in 2011 in order to maintain internal cohesion,” he added.

The military does not trust the civilian bureaucracy, viewing it as too corrupt and inefficient, seeking to replace it with the military bureaucracy to assure investors that projects will run smoothly.

The real problem is the military’s privileged access to resources, Adly said.

The military is Egypt’s biggest landowner and thus effectively controls land values. A 1997 law granted it control over all unowned coastal lands for reasons of border security, yet these lands are commonly sold to the private sector to be tuned into residential areas or high-end resorts.

The military uses its land ownership for what economists like Adly call rent-seeking, making money through its role as regulator.

For example, when an investor decides to buy military owned land, the investor must verify that it is free of mines. The only way to do this is through an office controlled by the military, which charges a fee to certify the land. Thus, the different branches of the military send business to one other.

Local governance is also run by the military. Out of 27 regional governors, 14 are former military generals. Decisions by governors, unlike cabinet ministers, are not published in the official gazette.

Although it is possible to gauge the contracts and money awarded to the military by the central government, local projects suffer even less transparency.

Adly believes that in order to get a proper estimate of military influence of the economy, a financial statement from the military is required: a list of assets, not just operations.

“We need to be asking what is a military’s economic role? It is now an executive authority that is also a participant in the market, that is a conflict of interest,” he said.

These questions are unlikely to come up soon, either in parliament or the local media.

Recently freed steel tycoon Ahmed Ezz, a stalwart of the Mubarak regime who was held on corruption charges after the revolution, announced he was considering running for his old parliamentary seat. Two of Mubarak’s prime ministers are leading electoral alliances in the coming election.

An old joke that Mubarak’s son Gamal might run for the presidency in 2018 no longer seems as farfetched.

Support for this project was provided by The Correspondents Fund with additional funding from the Stabile Center for Investigative Journalism at the Columbia University Graduate School of Journalism in New York. The reporting fellowship is dedicated to the spirit of late colleagues Anthony Shadid, Marie Colvin and James Foley who all dedicated themselves to on-the-ground reporting to tell the stories of the people caught in the tumult and conflict of the Middle East.