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The Military Economic Republic of Egypt

Mahmoud Elsobky
Investigative Journalist and Writer
September 29, 2021
This in-depth report documents the monopoly of the Egyptian Armed Forces and the Egyptian General Intelligence on many state projects and public contracting works, at higher prices than private companies, and their profiting in ways that may be illegal.

After Abdel Fattah al-Sisi was elected President in May 2014, several amendments to the public procurement law were made that allowed the Egyptian military to further strengthen its grip on the economy.

The amendments helped companies affiliated with the army reap the lion’s share of major public contracts, including the construction of the new administrative capital in Cairo, real estate projects, highways and infrastructure, that were granted under direct, non-competitive bidding.

Nile Valley

But they also fueled controversy among private contractors, raising suspicion of corruption because of the lack of competition.Today, a new class of businessmen, most of whom are military retirees or Egyptians with strong links to public institutions and local governors, are benefitting from these amendments.

One example is the Wadi Nile For Contracting and Real Estate Investment, fully owned by the General Intelligence Directorate (GID), which has acquired 40% of hospital construction and reconstruction contracts. It has also been tasked with supplying medical equipment to the Ministry of Health, the company’s assistant president for projects Abdel Sattar Mohamed, told Al-Dustour newspaper in 2019.

The Egyptian Armed Forces (EAF) Engineering Authority — effectively the army’s investment arm — is playing a pivotal role together with the New Urban Communities Authority, coordinating the process of awarding contracts on the basis of non-competitive bidding. This in-depth report looks at the monopoly of both the EAF, and the General Intelligence Directorate on state projects and public contracting works, often charging higher prices than private companies, and profiting in ways that some experts consider illegal.

The process of manipulation is often facilitated by additional supervision fees that are equivalent to half the project’s value, the exploitation of subcontractors, and by covering up poor quality construction and the lack of technical expertise. The EAF refused repeated requests for comment sent by the Organized Crime and Corruption Reporting Project (OCCRP), a media partner of Daraj.com, on the findings of this report. The requests were sent to the Cairo Media Office at the Foreign Office, which handles all requests made by foreign media.

Starting Point

Between July 4, 2013 and June 8, 2014, Interim President Adly Mansour issued a series of amendments to the 1998 Tenders and Bids Law that used flexible language, allowing for interpretation, according to several lawyers and businessmen.But in 2018, when al-Sisi replaced the 1998 Tenders and Bids Law with Law 182 of 2018 on organizing public contracts, the role of military institutions spun out of control as competent authorities were allowed to directly issue contracts without being bound by the previously implemented procedures and financial limits.

Financial and legal experts who reviewed Law 182/2018 for this in-depth report by Daraj.com, said that:

a) contracting by “direct agreement” remains legal, with revised thresholds (i.e. maximum contract value that may be awarded by direct agreement), andb) that the ministries of defence, military production, and interior and their respective agencies are empowered to utilize direct agreement (as well as limited bidding, two-stage bidding, local bidding, limited practice) (Article 77).

What strands out in Article 77 they said is:

1) the thresholds that are applied to civilian agencies are not explicitly mentioned in relation here, so they believe this means that there are no thresholds for the ministries of defence, military production, and interior and their respective agencies,

2) and their relevant authorities have the power to delegate the right to award contracts by direct agreement (which is explicitly banned for civilian agencies).

They told Daraj.com that the justification for awarding contracts by direct agreement must be certified by the Procurement Department [idarat al-ta’aqudat], but added that they suspect this refers only to civilian agencies.

Military and security agencies are “probably” exempt from this since they are not explicitly mentioned in Article 77, and since the basis of Article 77 (Law 204 of 1957) established the exemption of arms deals (which is used to cover everything the military does) from financial regulations, they added.

The law also includes a paragraph that allows direct contracting for orders made by the Arab Organization for Industrialization (AOI), an independent military institution directly affiliated with the Presidency of the Republic.

The AOI, which is exempt from taxes and custom duties, was set up in 1975 by Egypt, Saudi Arabia, the United Arab Emirates and Qatar, to develop a pan-Arab defence industry. After the signing of the Egypt-Israel peace treaty in 1979, the latter became the sole owner of AOI in 1993.

The amendment, published in the Official Gazette on October 3, 2018, also applies to the National Authority for Military Production (NAMP), a public body affiliated to the Ministry of Military Production established in 1984 and to the GID, an independent body affiliated with the Presidency of the Republic.

NAMP owns 19 companies in addition to five partly-owned joint ventures.

GID was established in 1954 by a decree issued by President Gamal Abdel Nasser and since 2014 has controlled much of Egypt’s media companies and the entertainment market through its subsidiary, the United Media Services Company.

Owners of the Republic

The awarding of major contracts to institutions affiliated with the armed forces and the presidency hasn’t gone unnoticed.

Yezid Sayigh, a senior researcher at the Malcolm H. Kerr Carnegie Middle East Center, in a 2019 study ‘Owners of the Republic,’ said that the awarding of “increasingly large and ambitious public works contracts to the Egyptian Armed Forces (EAF) departments suggests that the armed forces has considerable capacity to design, implement and service projects, and all to a high standard.”

The army also “plays the role of project manager by assigning projects to sub-contractors from the private sector, which have no choice but to accept army prices and, sometimes, absorb losses and work for free,” added Sayigh, who heads the Carnegie program on Civil-Military Relations in Arab States.

Sayigh told Daraj.com that the ministries of defence, military production and interior and their respective agencies, still enjoy power to award contracts without a competitive bidding process.

“This means there is a risk that this power may be abused, by favouring select companies, including some with direct or indirect ties to officers or to preferred civilians. This does not prove there is corruption or cronyism, but it creates big opportunities for it,” he said.

The legal amendments have upset several members of the Egyptian Federation for Construction and Building Contractors (EFCBC), as they opened the door wide open for state institutions to obtain government contracts without any oversight.

The head of the 25,000-member federation, Mohamed Sami Saad, said that the number of Egyptian entities capable of implementing large projects does not exceed 20% of the total registered companies.

“The army has become an unfair competitor to the private sector because it enjoys the privileges of the armed forces in terms of exemption from taxes and custom duties,” an Egyptian lecturer in political economy in Belgium told Daraj.com on the condition of anonymity.

Moreover, “legal matters are settled before a military court. This biased equation has caused a loss for the private sector. The reduced chance to win public tenders, has led to salary reduction in many companies, layoffs and bankruptcy” he said.

“I am against direct award contracts without knowing the full details,” Hossam Badrawi, former head of the ruling National Democratic Party of deposed president Hosni Mubarak (1981-2011). “Without bidding, there will be no better offers. That is the ABC of economics and good governance”, he told Daraj.com.“The chaos Egypt witnessed after the tremors of the 2011 Arab Spring led to the flight of many prominent private sector faces abroad and the closure of many factories,” said Badrawi, who resigned on February 11, 2011 — six days after his appointment. “It caused a gap, which the state and army filled. However, this intervention and transitional period must not last for years. Otherwise it is a mistake.”

“The Economy of Necessity”

A contractor specialized in infrastructure projects, who has worked with major Egyptian and international companies for two decades, had a different view.

Opting to remain anonymous, he emphasized that the legal amendments accompanied President Sisi’s insistence on implementing rapid economic reform by aligning the private sector with the state’s investment strategy.

This was coupled with a commitment to a largely free market economy in order to achieve economic growth and improve financial efficiency.

The contractor said the existence of “an economy within the Egyptian economy run by the armed forces is a fact that has been known for decades. The proceeds go directly into the budget to support the army’s role.” “What is new is that the awarding of contracts has significantly increased during the Sisi era, when compared to the era of his predecessor, Mubarak. Before [Sisi], there were no big construction projects, like bridges, roads, and other infrastructure. Today, things have changed a lot!,” the contractor told Daraj.

The process of direct tendering also has advantages in exceptional cases because it offers opportunities to “medium and small-sized” contractors to benefit from the support of major companies in the implementation of projects, he said.

“Awarding contracts directly can be beneficial because winning contracts through tenders is not always possible, due to the high costs of projects and the inability of many companies to wait 6 to 8 months to get their dues from the government. And not many contractors are capable of implementing projects at the speed and scale required by Sisi.”

This was echoed by a businessperson close to the regime. Speaking on the condition of anonymity, he said the private sector was not prepared to face major risks after the army seized power. “They did not want to lose billions of pounds in investments,” he said, adding that this fear gave birth to the “economy of necessity where the army had to revive some sectors” to reduce corruption plaguing the public sector.

“At this moment in time, the army had to intervene,” explained the contractor, citing the Ministry of Health as an example. “Is the private sector able to meet the needs of the health sector? The answer is no! Because the private sector does not want to work with the Ministry of Health to avoid headaches after a well-known businessman was imprisoned over the famous contaminated blood bag case.”

Military Projects Worth Billions

In February 2015, the Ministry of Local Development contracted the EAF Engineering Authority to implement infrastructure projects in 78 villages for LE 1.75 billion ($228,693,000 million) in what would be the first phase of the National Project for the Development of Egyptian Villages.

The project, part of Sisi’s “Egypt Vision 2030,” aims to develop all 4,741 Egyptian villages through boosting infrastructure, public services and income-generating projects to create jobs for an estimated cost of LE 515 billion ($67,320,261 billion).

Wadi El Nile for Contracting and Real Estate Investment Company, run by retired officers, is a main implementer of this project, and has thus far built 100 hospitals and 850 health clinics, and has refurbished 47 hospitals, according to their website.

On March 1, 2021, Health Minister Hala Zayed met with Engineer Hani Dahi, Chairman of the Wadi El Nile Company, to discuss a plan to develop hospitals and health units in 51 districts in 20 governorates in the first phase of the project. Wadi El Nile company also supplied medical devices and hospital supplies, the company’s assistant president for projects and follow-up Abdul Sattar Muhammad, told local paper Al-Dustour on October 26, 2019. The company also equipped 180 hospitals and 1,800 health units, and supplied about 3,500 ambulances, according to their website.

Hossam El-Hamalawy, a member of the opposition Egyptian Revolutionary Socialists and living in Berlin since 2017, sees this as another indication that the army’s engineering corps is dominating the economic scene. “The civilian ministers in the foreground are just puppets. They are not decision-makers. They do not have a final say on anything,” he said, adding that this applies to all sectors, not just health.

Contractor Mohammad Ali

Fierce Defense

Mahmoud Attia, a lawyer and the head of the political coalition “Egypt Above All” termed the critics of the army’s increasing role in public contracting “thief businessmen who cheaply took over public companies.”

The army, he said, uses these projects to fund the army budget and the national budget “with billions of pounds,” but that they don’t announce it “because of national security.”

How are Tenders Arranged?

Mohamed Ali, an Egyptian contractor who exposed alleged corruption in the government, spoke to Daraj.com from Spain, his place of refuge, about the mechanisms of public tenders as he had experienced them. For 15 years, he worked on major development projects in Egypt, and saw firsthand how the tendering process was manipulated behind the scenes.

Ali, who is also on Interpol’s most wanted list in Egypt, confirmed that the army “processes bid papers in a professional manner to the point where the Central Auditing Organization is not able to find any errors or loopholes when it reviews the tender documents.”Fair bidding procedures exist on paper only, he said, adding that usually, despite appearing like a fair bidding process, “the contractor who ends up winning the bid is predetermined in advance in cooperation with the authorities.”

In anger at the corruption he witnessed, Ali began sharing his experiences on a Youtube channel that garnered mass followers back home. In September 2020, a number of his followers responded to his call and staged protests across cities in Egypt decrying corruption.

The Spanish judiciary summoned him in July 2020 to answer the Egyptian demand for his extradition on the grounds of money-laundering and tax evasion. The Egyptian prosecutor’s office has accused Ali of defrauding Euros 6.9 million in three cases of fraudulent real estate sales and a fourth for money laundering.

Ali denies any wrongdoing and wants Egyptian authorities to present documents proving these claims.

Egyptian state media and officials have also accused Ali of posing as a fake witness supported by an enemy country to drive a wedge between the army and the Egyptian people.

Distribution of Roles

Ali, with insight into the tendering process, explained how it works. He said it starts with a special price at which a bid is submitted. After negotiations, a deal is agreed on.

Then, a delegate from the winning contracting company is sent to obtain the request for proposal to start official procedures. Despite appearing “natural,” the procedure is all pre-organized, and in the end the contract is awarded to the predetermined company.

The winning contractor then sends representatives to the appropriate ministry to buy the proposal, and the employees fill out the bidding papers with “fictitious” competitors. These companies, who are supposed to be competing in complete secrecy, share their bid, so the predetermined winner would know to submit the lowest bid, and then eventually be chosen by the tendering committee. Ali claimed that because of his “relationships”, he was able to control all contractors except for two tycoons whose companies won public bids worth billions of dollars in the last two decades. “I could distribute work among contractors and no one dared to give me no as an answer.”

Ali said his links to government officials and military institutions also allowed him to win the lion’s share of contracts he bid for before he decided to flee Egypt in 2019, when his relationship with the military turned sour as a result of delayed payments.

(Daraj.com reserves the right to not mention the names of the two companies or the individuals involved due to the inability to contact them for comment)

The Bidding Committee

The names of the members of the bidding committee are confidential, according to Ali, but is composed of “representatives of the military intelligence, the EAF’s financial branch, the EAF’s engineering corps, and a representative from the concerned ministry or government body.”

The financial branch reviews all financial matters while the technical officer of the corps reviews technical specifications before approval. The role of the military intelligence representative is confined to monitoring the tendering process.

“They set a specific day for opening the technical envelope to assess the company’s technical capability and its ability to implement the project,” Ali told Daraj.com, “then, after a week to ten days later, the financial envelope is opened.”

After Sisi’s Arrival

After Sisi came to power, the number of state projects represented by various military bodies increased, according to Ali.

“If we were driving at a speed of 30 km/hour, Sisi made us drive at 940/km/hour. The projects Sisi talks about run in the billions,” he said.

Completing projects at an accelerated rate may have dire consequences for the final product.

“Sisi placed a great burden on the EAF’s engineering corps who did not have the required technical capabilities,” Ali claimed. “He entrusted them with a job worth billions. The inefficiency of the corps to work with contractors resulted in delays and extra payments of penalties by the state”.

Subcontractors

An engineer at a consultancy firm which carries out work for the armed forces, said subcontractors need to have contacts with senior officers to gain access to the EAF’s contracts.

Several contractors complained about delays in receiving government payments based on completion or having to deal with “procrastination or rejection” of making these payments for various reasons.

They are left with no choice but to complain to a military tribunal if the dispute is with the EAF because all military entities, facilities, and assets are under the exclusive jurisdiction of these courts.

“As a consequence, the rights of civilian business partners engaged in joint ventures, or even subcontractors, fall into a legal gray zone,” according to Sayigh’s study.

The Army is the Solution

Attorney Attia believes there are “many advantages” to granting projects to various security engineering corps.

“When the army starts a project, it will quickly implement it from the ground up. They are disciplined and they always follow orders,” he said, adding that “Private companies want no competition from anyone. This is not in the best interest of the Egyptian people.”

But is the army really capable of implementing these big projects, as it claims? To Ali and many of his peers, the answer is no.

“The army is the first party to receive the implemented projects before concerned authorities take them over,” Ali told Daraj. “No one dares to criticize the work of the army. Anyone who dares hold the army engineering body accountable will be imprisoned or killed,” Ali said.

The contracting sector contributed by 17% to Egypt’s Gross Domestic Product, which stood at some LE 5.82 trillion Egyptian pounds ($363.07 billion) in 2020, according to the head of the Egyptian Federation for Construction and Building Contractors.

The defence ministry’s overall budget stood at LE 113.8 billion Egyptian pounds ($7.25 billion) in 2021. Its details are not disclosed. But several media reports have estimated army-entities generated an income of between $ 6-7 billion in 2019.

The military’s contribution to the national economy does not exceed 1.5 to 2%, Sisi said in 2016.

Three years later, in 2019, he said that he would like to see the army list its companies on the stock exchange, similar to the 23 state-owned companies which are set to be privatized as part of a program aimed at raising nearly 80 billion pounds ($4,959.702 billion).

Government officials claim the program has been repeatedly delayed for reasons related to weak markets and legal obstacles.

Egypt fell from 106 in 2019 to 117 in the 2020 Transparency International Corruption Perception Index, ranking 11th out of 22 Arab countries.

A Shift in the Wealth Distribution

The same Egyptian academic, who also lectures at a university in Belgium, believes that the Egyptian army’s interference in the economy has created a new version of state capitalism, following the era of Arab socialism in the 1960s and the policy of privatization under former President Mubarak.

“Before that, wealth distribution in the country was also unfair, but it was still in the interest of the private sector, as the market could see money circulating,” they said, adding “Now, the money is circulating in the dark, you can’t see it. You can’t count what’s going on, not even the percentage of taxes that are not taken out of these projects”.

World Bank and IMF: How Long?

The IMF and the World Bank support most of Sisi’s reform policies granting Cairo loans, according to some diplomats.

This, however, is often ignoring unfair competition between military-linked companies and private firms, according to several economists. The IMF and the WB did not reply to Daraj.com request for comment. El-Hamalawy, the opposition journalist, believes such support will continue so long as there is an absence of an alternative in region of geopolitical importance “that can secure political stability, fight terrorism, and protect the interests of the U.S. and Israel”.

This, however, could change if a new military and economic elite emerges that is capable of carrying out deeper reforms that mimic the policies of international supporters concerned with Egypt’s stability.

This in-depth report was published in cooperation with Daraj.com and supported by the Brussels-based European Press Organization (www.journalismfund.eu) and its Money Trail Project (www.money-trail.org )


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