What are the real reasons behind putting the Egyptian army companies on the stock exchange?
Cairo – Through statements that seem usual from government officials regarding everything related to the military establishment, Egyptian Prime Minister Mostafa Madbouly defended the economic activity of his country’s army, reiterating the talk of his government targeting the listing of many state-owned companies and armed forces on the stock exchange during the next year.
During a television interview with BBC Arabic, the prime minister underestimated the size of the armed forces’ investments, explaining that they do not represent anything in the economy, and with the numbers and the growth of the economy, it is less than 1%, he said.
He increased his defense of the military institution to which the president belongs by denying the reluctance of army-affiliated companies operating in civilian sectors to announce their budget, pointing out that the private sector does not cover all market needs, as well as strategic sectors that affect national security.
The announcement of the shares of companies owned by the army on the stock exchange is not new. During the last quarter of 2019, President Abdel Fattah al-Sisi made several statements about listing some military establishment companies in the stock market, considering the army’s intervention with its companies in the civilian sector “a necessity to meet strategic needs or to reduce prices.”
After that, there were successive statements by official officials about the preparations to put the military establishment’s companies on the stock exchange, without specifying a time frame for that.
The trading of the shares of companies owned by the military on the stock exchange opens the door to several questions about the reasons that prompted the authority to take this step and the expected effects on the performance of the stock market, the position of the private sector and foreign investment, as well as the reason why the Prime Minister renewed the talk about putting army companies on the stock market in This timing.
The army’s economic activities remain a wide secret, as it is difficult to determine the exact size of its investments, in addition to the conflicting official statements regarding the size of its work in the framework of the gross national product.
Madbouly stated that the size of the army’s economy does not exceed 1% of the total economy, and the head of state stressed that the armed forces do not work with more than 3% of the national product.
There are 60 military companies operating in 19 industries, out of a total of 24 on the industry classification table, as estimated by the World Bank.
The National Service Projects Organization, which is affiliated with the military, controls 32 companies, a third of which were established after 2015, according to a report by the Financial Times.
The army owns 51% of the assets of a company developing the new administrative capital – located 60 km east of Cairo – whose investments are estimated at $45 billion.
In a report issued in November 2019, the Carnegie Middle East Institute warned against the growing interference of the Egyptian army in the national economy, as it has targeted most of the country’s vital sectors.
He explained that the army provides huge infrastructure projects, produces consumer goods such as food and household appliances, and manufactures chemicals and transportation equipment, in addition to its involvement in other fields such as gold mining, religious endowments management, and pilgrimages.
Matters are not limited to the entry of the army with its products and services into the competition market, but also extend to the concept of unfair competition due to government measures that help everything that is military at the expense of civilians.
Last November, businessman Naguib Sawiris said competition between the public and private sectors was unfair.
He added, in an interview with Agence France-Presse, that government-owned or military-affiliated companies do not pay taxes or customs, so competition with the private sector from the beginning is unfair, stressing the need for the state to be a regulator and not an owner of economic activity.
Under laws issued during the era of ousted President Hosni Mubarak, armed forces companies are exempted from import duties and income tax.
In 2015, a decree was issued by the Minister of Defense exempting about 600 hotels, resorts, and for-profit facilities owned by the armed forces from real estate taxes.
In addition, the value-added tax law was issued, in 2016, exempting the armed forces and other security institutions from paying the prescribed added tax on goods, equipment, machinery, services, and raw materials needed for the purposes of armament, defense and national security, “and the Ministry of Defense has the right to decide which goods and services the law applies to.” .
Preparations before offering
In December 2020, Hala Al-Saeed, Minister of Planning and Chairman of the Board of Directors of the Sovereign Fund of Egypt, announced the selection of two companies affiliated with the National Service Authority, the National Natural Water Bottling Company (Safi) and the National Petroleum Company, to offer them to the private sector for investment as a first stage before they are listed on the stock exchange.
Al-Saeed stated – in an official statement – the continuation of cooperation with the National Service Projects Organization in other companies, which will be announced successively.
In February 2020, Egypt’s sovereign fund signed a cooperation agreement with the National Service Projects Organization to invest in its companies.
The minister explained that the companies affiliated with the army will be offered to the private sector according to conditions and controls that guarantee the achievement of the highest returns for the state and create investment opportunities for the private sector in the first stage, as well as an opportunity for citizens to own shares in them and invest in their shares.
In the same context, the CEO of the Sovereign Fund of Egypt, Ayman Soliman, revealed that the initial plan aims to sell nearly 100% of the shares of 10 companies owned by the National Service Projects Authority, as the fund will help in selecting assets and promoting them to investors.
In statements to Bloomberg, Soliman explained the possibility of Egypt’s sovereign fund participating in the offerings by acquiring minority stakes in those companies.
Army companies are preparing to compete in the stock market in the face of unfair competition in the business market, which raises several questions about the future of the presence of military companies on the Egyptian Stock Exchange, according to observers.
For his part, the economic expert, Dr. Abdul Nabi Abdul Muttalib, spoke about the future of the army companies if they are listed on the stock exchange, stressing that it will depend on the percentage of shares offered in the trading market.
He added, “If the percentage of shares is less than 25% of the company’s capital, it will provide more liquidity for these companies, and much of their management method will not change. But if the percentage is above 50%, then the army companies will turn from closed subscription companies to open public companies, It will be owned by subscribers, which means a change in the way and method of management.”
On the reasons that prompted the authority to put the military establishment companies on the stock exchange, Abdul Muttalib confirmed – in his speech to Al Jazeera Net – that the matter dates back to 2016 at the time of the government’s agreement with the International Monetary Fund on a $12 billion loan.
This international fund had recommended listing the shares of all state-owned companies and financial institutions, and that they should engage in civil activities on the stock exchange.
The economist expected that putting the army and other companies on the stock exchange would revive the stock market and increase the volume of transactions in it, in addition to establishing new projects with the expansion of existing projects, which means higher growth rates.
In continuation of the expectations, it was ruled out that there would be a crowding of the army companies with the private sector within the stock market. It is likely that the opposite will happen and the inclusion of the military establishment companies will encourage a larger number of investors to enter the capital market.
As for the impact of listing these companies on the stock exchange on the volume of daily trading and the confidence of the foreign investor in the Egyptian capital market, Abdel Muttalib explained that the matter depends on the way the stock exchange itself is managed.
He continued, “If all stocks are subject to disclosure and disclosure standards and other working mechanisms of global stock exchanges, the strength of the stock exchange will increase, the daily trading volume and quantity will increase, and the administrative mechanisms used to control daily transactions will be greatly reduced.”
Does the army give up its companies?
The vision of this well-intentioned economist appears to be the move to put the army’s companies on the stock exchange and is optimistic about its future, which is what the professor of economics at the American University of Auckland, Dr. Mustafa Shaheen, disagrees with, who ruled out taking such a step in the first place.
Shaheen told Al Jazeera Net that government officials have been talking for a long time about putting army companies on the stock exchange, but nothing happened on the ground.
He ruled out that the army would give up its companies so easily, and added, “The military authority aims to control the entire economy in favor of the army, which means that it is illogical for those companies to be neglected by listing them on the stock exchange.”
Therefore, the professor of economics at the University of Auckland considered the Prime Minister’s statements about the army companies an attempt to calm and reassure the domestic and foreign investor only.
He concluded by saying that the Egyptian Stock Exchange in general had achieved great losses during the last period due to the lack of transparency and the lack of real guarantees for investors.