Procurement of new defense systems and maintenance and support for existing equipment to drive the Egyptian defense market

Tuesday 3 July 2012, Amsterdam

During the review period (2007-2011), the total defense expenditure of Egypt recorded a CAGR of -2.01% to value US$4.24 bn in 2011, excluding US$1.3 bn of US military aid. The capex allocation for the acquisition of military hardware and technology is estimated at US$1.6 bn for 2010, including procurements made with US military aid. Furthermore, defense expenditure is expected to record a CAGR of 0.75% during the forecast period (2012-2016) and reach a value of US$4.01 bn in 2016. Egypt’s defense expenditure over the forecast period is expected to total US$19.48 bn (see graph).

Egypt does not follow open market and fair competition principles regarding defense deals; instead it prefers to conduct private government to government or military to military talks regarding defense procurements, making it difficult for foreign firms to compete. Additionally, the country does not follow a structured defense budgeting mechanism, which often results in improper budget allocation and a high level of corruption in the armed forces. A number of foreign OEMs find the lack of transparency in Egypt’s defense deals and the delays in finalization, key challenges to the successful execution of defense deals in the country.

Egypt is currently undergoing its greatest political change in half a century, and the mass civil protests that started in January 2011 have led to the fall of the country’s authoritarian regime and the promise of democratic presidential elections in November 2011. As a result of this period of dramatic change, the country is currently characterized by political instability. This uncertainty has discouraged foreign defense companies from continuing to participate in Egypt’s defense sector and has deterred new participants from establishing operations in the country.

US FMF accounts for almost 80% of the country’s defense capital expenditure, and according to the contract, the whole amount is spent on military procurement from US contractors, resulting in a large quantity of US equipment in Egypt’s arsenal. The two countries enjoy a close relationship that is set to continue in the forecast period due to Egypt’s dependence on US companies for the maintenance and life support of its equipment and weapons. This relationship poses a greater roadblock for other foreign companies to enter the Egyptian defense market.