Analysis

Egypt Needs to Free Its Construction Industry From the Army’s Stranglehold

President Sissi’s declaration on the need to privatize the sector seems to be an effort to encourage foreign and local investment

Small groups of protesters gather in central Cairo in response to a call by self-exiled businessman Mohamed Ali,September 21, 2019.
Reuters/Amr Abdallah Dalsh

Egyptian President Abdel-Fattah al-Sissi clearly understood the significance of the articles about corruption in the Egyptian army written by the former military contractor and actor Mohamed Ali.

Anti-regime demonstrations in Cairo and Alexandria in September in response to the articles have faded, and since then Sissi has sought to expedite passage of legislation on construction oversight and issued a precedent-setting declaration that civilian companies controlled by the army have to be privatized to broaden the private sector’s participation in the Egyptian economy.

Don’t hold your breath waiting for privatization. Such plans have existed since the time in office of former President Hosni Mubarak, who raised the banner of privatization without notable success.

And when it comes to the privatization of military firms, the army can be expected to fight tooth and nail to block the effort, since the companies are the most military’s most important source of funding beyond the government military budget. Moreover, these companies – which include construction firms, tourism companies and firms licensed to import baby food and build roads – give the army economic and political influence over the Egyptian government.

Sissi knows this well from when he was chief of the army’s general staff – when he himself objected to privatizing the military corporations. But now some of the circumstances have changed.

The International Monetary Fund, which has provided Egypt a loan of $12 billion, is demanding that the country reduce military involvement in the civilian market to open up the private sector, which represents no more than about 15 percent of the construction market, for example. The construction industry is essential to Egypt’s economy, contributing 16 percent of the country’s GDP and employing 5 percent of the Egyptian labor force.

‘Invaded’ by the army

Since 2014, the army has “invaded” the construction sector, mainly because of the Egyptian military’s engineering capabilities, its available personnel and the pace of its work, which have made it the country’s largest building contractor. By contrast, private firms face not only sluggish bureaucracy and unionized workers who dictate working conditions, but most importantly, the cost of land for construction.

The army gets it for free from the government, while civilian contractors pay market price, which is constantly climbing. The country’s contractors association expects land prices to increase by 15 percent next year alone.

Only 6 percent of Egypt’s land is being used, a report by the international financial services firm HSBC noted. If Egypt expects to overcome the huge shortage of housing in the country, it will have to at least double the amount of land zoned for construction.

Egyptian President Mohammed al-Sissi
Carlos Barria/Reuters

The Egyptian Housing Ministry has plans that extend to 2050, according to which Egypt is planning to build 20 mega-cities that would accommodate 30 million people. But by 2050, based on the current annual 2.45 percent population growth, Egypt’s will be home to 180 million people. The country already has a shortfall of more than half a million apartments, but it would have to add a similar amount of housing every year to meet ongoing demand.

The concern, therefore, is where these homes will come from, and who will be able to buy them if the prices keep going up at the current pace. Egypt’s central bank has in fact reduced the interest rate on loans for a third time since July, but the rate is still 15.5 percent, putting homes only in reach of the upper-middle or upper classes.

And unlike ordinary citizens, military personnel have access to a special fund set up in 1988 that provides easy loan terms on homes as well as land provided for next to nothing from the military’s land holdings.

Reports from international financial institutions and the Egyptian central bank indicate that the construction industry will be the most active sector in the coming years. This year there has already been a 40 percent in the number of homes on the market. But that statistic is based on construction that has been ongoing for years and has only now wrapped up, so even that impressive volume won’t resolve the housing shortage unless the pace of housing starts increases.

Plunging foreign investment

Egypt has to encourage foreign investors to enter the country’s construction and industrial sectors rather than their making do with the local stock market or investments that don’t generate large numbers of jobs, such as the oil and gas sectors. In that regard, the numbers are not encouraging. Foreign investment has plunged 23 percent, to $6 billion a year.

Sissi’s declaration regarding the need to privatize the military’s civilian companies seems to have been intended to open a window of opportunity for foreign and local investors, particularly those who have avoided the Egyptian construction industry because of the army’s control of the sector. But such statements, even if they encourage investors to enter the market, will require putting this chaotic industry’s bureaucratic and legislative house in order.

The legislation now being considered in parliament is aimed at guaranteeing greater transparency, stricter government oversight of construction companies, compensation arrangements for the violation of contracts, sanctions for not meeting construction schedules and the creation of a contractors organization with sole responsibility for the supervision of construction companies. Other provisions would ensure fair competition and the protection of the rights of buyers.

But even if the law is passed, it will most likely not affect the conduct of the military’s construction companies, which are exempt from parliamentary oversight and reporting – and aren’t subject to oversight from the government either.