In a swift series of decrees issued August 12, President Mohamed Morsi stripped the Supreme Council of the Armed Forces of its executive powers and dismissed key military figures, including defense minister and SCAF leader Hussein Tantawi. With these bold moves, Morsi ushered in a new phase in the shifting power balance between Egypt's military and civilian leadership. But, as a new report released by the Carnegie Endowment for International Peace illustrates, an equally important - and perhaps even more contentious - struggle remains: the battle for control over Egypt's economy.

In "Above the State: The Officers' Republic in Egypt," Yezid Sayigh, a senior associate at the Carnegie Middle East Center in Beirut, outlines the development of the country's "officers' republic," defined as "self-perpetuating military networks that permeate virtually all branches and levels of state administration" as well as "the state-owned sectors of the economy."

These networks have existed since 1952, writes Sayigh, when the Egyptian Armed Forces overthrew the monarchy. But it was after 1991 that they expanded most dramatically, under a patronage system established by then-President Hosni Mubarak. In exchange for their loyalty, Sayigh explains, senior officers were promised post-retirement positions in government ministries, agencies and state-owned companies - lucrative posts that offered supplementary salaries and ample opportunity to accumulate wealth.

Sayigh believes that this setup was thanks to the convergence of three factors. First, Mubarak sought to neutralize any threats to his own power by preventing the rise of popular, powerful officers and drawing senior officers into his patronage system. Second, as conflict with armed Islamists intensified during the 1990s, Mubarak increasingly relied on military retirees to staff local governments, augmenting the internal security apparatus formed by the Interior Ministry and the General Intelligence Directorate. As a result, military retirees came to "staff all levels of local government, acting as a parallel executive and security arm that ultimately reports to the president through the provincial governors." Finally, in line with liberalization measures negotiated with the International Monetary Fund, Mubarak began privatizing state economic enterprises in 1991. But the corrupt way in which these reforms were implemented, Sayigh argues, meant they did not lead to a truly free market. Instead, many sectors were reshuffled but remained under partial state control, enabling Mubarak to still appoint preferred officers to plum positions.

Since privatization began, military retirees have dominated the large commercial holding companies that now oversee public-sector enterprises. Officers head or occupy key positions in holding companies for aviation and airports, maritime and land transport (including seaport authorities), electricity, water and sanitation, and many of their subsidiaries. They also dominate the state-owned natural gas and oil industry, and companies offering related services. The same is true of other utilities, such as Telecom Egypt.

These positions are among the most lucrative posts available to retired military officers. While official end-of-service pensions pay major generals a maximum of just $500 (around LE 3,000) per month, salaries in these holding companies can reportedly reach LE 500,000. Consultancy positions at government agencies or the private companies that service them are another valuable avenue for patronage. "The best connected accumulate several such consultancies in parallel, few if any of which involve more than nominal tasks or attendance," writes Sayigh. These retirees reportedly are compensated anywhere from LE 6,000 to LE 28,000 a month for their services, as well as up to LE 10,000 a month in bonuses and expenses.

Retired officers don't just serve as ministerial consultants. In addition to dominating local government, military personnel have a virtual monopoly on the ministries of defense, military production, civil aviation and local development. Military retirees have also often served as ministers, undersecretaries and director generals of the transport, communications, environment and social solidarity ministries. These appointments, Sayigh says, are justified by an anti-civilian discourse that claims that non-military bureaucrats and managers "are less competent, honest, and patriotic, or at the very least need paternal guidance." Once in place, this military-dominated system has created a feedback loop that further solidifies the prominence of the military in economic life: While some retired officers are undoubtedly skilled managers, much of their perceived effectiveness is because their colleagues are entrenched throughout the system. "Military retirees are naturally able to 'get things done' because they created much of the administrative system within which they operate and their networks pervade it, facilitating navigation through the bureaucratic maze," writes Sayigh.

He cites a business meeting early in 2012: "The minister of military production, Major General Ali Ibrahim Sabri, signed an agreement to develop the Giza governorate's wholesale market. Signing for the other side was the wholesale market's executive head, Major General Mohammed Sami Abdul-Rahim. In attendance were the deputy governor of Giza, Major General Usama Shama'ah; the secretary-general of the local council, Major General Mohammad al-Sheikh; and his assistant secretary-general, Major General Ahmad Hani."

As the example suggests, in addition to their prominent role in the civilian public sector, the armed forces also generate substantial funds through the official military economy, via entities such as the Ministry of Military Production. Armed forces-owned enterprises - which range from factories that produce military equipment to civilian contracting services as well as hotels, real estate, and consumer goods such as pasta and bottled water - generate revenue that does not pass through public coffers. Instead, Sayigh explains, "A special accounting office in the Ministry of Finance deals with the [armed forces] and affiliated entities ... but its data is not under the control or oversight of parliament or any other civilian body." How much money these enterprises generate, or how it is spent, is guarded as a military secret.

Some of these funds are probably spent on officers' allowances, housing and other perks, while the rest is either reinvested, or used to supplement operating funds from the central government, as well as the $1.3 billion in annual military aid given by the United States. Without an independent analysis, the details are impossible to confirm. Sayigh does not venture a figure, but other analysts estimate that military businesses are worth anywhere from 10 to 30 percent of the country's GDP and employ more than 400,000 people. However, Sayigh does present data that hints at the vast wealth controlled by the military.
 
Since 2011, the SCAF has made a series of high profile asset transfers to the state budget. It has loaned Egypt's central bank LE 1 billion to prop up the Egyptian pound, donated LE 2 billion for low income housing and ceded 3,876 acres of army controlled land to residential housing. "In all, the SCAF claims to have pumped a total of LE 12.2 billion ($2.33 billion) from its own resources into the state apparatus in the year leading up to March 2012."

These gifts were meant to demonstrate the military's beneficence and show solidarity with the common man, but, in fact, they highlight the extent to which the military places itself apart from, and indeed above, the rest of the nation. The army donates funds to the state, but categorically refuses to open its books for civilian authorities, let alone treat its assets as public wealth to be distributed according to the wishes of elected authorities. According to Sayigh, many of the military's actions since February 2011 are attempts to preserve this status quo. This, he says, "explains the series of attempts by the SCAF to parlay the powers it assumed in February 2011 into 'supra-constitutional' principles that would institutionalize its prerogatives and protections in formal arrangements, and place it permanently above the Egyptian state."

Sayigh's analysis focuses primarily on the potential political ramifications of the struggle by military personnel to keep this "officers' republic" alive and kicking. Whether or not Morsi is successful in his attempts to wrest executive authority from the military, retired officers are embedded in virtually every facet of the government, and they could easily block reform measures by interfering with the state's ability to implement policies or distribute goods and services. Moreover, with a significant (though as yet unknown) percentage of the country's economic life under the control of military officers and retirees, Sayigh's paper serves as a timely reminder that the private sector, too, should keep a close eye on developments.

© Business Monthly 2012