Pakistan: Armed Forces Inc.

The country's military dominates business

It's early morning in Islamabad, and a middle-class child sits down for breakfast. He pours sugar refined from Fauji Sugar Mills into a bowl of Fauji oatmeal, which his mother cooked using gas bottled by Fauji LPG. In the next room his father logs onto his computer running on electricity produced by the Fauji Kabirwala power plant and clicks onto a program that uses Fauji software. The house they all live in was, of course, built with Fauji cement.

The Fauji group is as pervasive a commercial presence in Pakistan as General Electric is in the U.S. And the Fauji companies, all part of the Fauji Foundation, are closely linked to an even more ubiquitous institution--the Pakistani military, itself a formidable force in the economy.

As international policymakers try to figure out how to help the economy of Pakistan, its reluctant ally in the war against terrorism, the issue of the military's role in the economy could turn out to be divisive. Long before a bloodless 1999 coup put General Pervez Musharraf on top, Pakistan's generals wielded tremendous influence on Pakistan's economy. That has hampered development of other businesses that might compete with military enterprises and also gives the generals a huge stake in maintaining the economic status quo--even though the economy has lurched from crisis to crisis. Meanwhile, civilian politicians who want to stay in office have been loath to tamper with the military's business privileges.

If American aid and loans start to pour into Pakistan, some of it will certainly end up with these companies, which have a flawed record, to say the least. Although Fauji and other military foundations use business profits to finance welfare benefits for ex-servicemen and their families, many of their companies are losing money, and the cash-strapped government is in no position to bail them out. Critics are calling more loudly for reform--not just because these companies are poorly operated, but because they have helped create a dual society in which military families are much better off than average Pakistanis. "The clout of the army makes it more influential than any other corporate body in terms of influencing nonmilitary decisions," says Tariq Rehman, professor of Linguistics and South Asian Studies at Quaid-i-Azam University in Islamabad. "It impedes the development of a civil society."

The Fauji Foundation is at the heart of the military's economic machine. With annual turnover of more than $500 million and profits of $41 million, Fauji provides womb-to-tomb benefits for more than 8.5 million ex-military men and their dependents. Retired servicemen get preferential hiring for the 10,000 jobs at the foundation's wholly owned companies. Thousands more find work at Fauji subsidiaries, while top management jobs are reserved for retired generals.

BIG PLAYER. And Fauji represents just part of the military's business operation. The army, navy, and air force operate their own corporate foundations, running everything from shoe stores to insurance companies. The foundations control some of the largest listed companies on the Karachi stock exchange. Beyond that, the Ministry of Defense pours public money into its own lucrative businesses, such as the Frontier Works Organization, which are engaged in such nonmilitary pursuits as road building, trucking, and property development.

Just how big a slice of the economic pie the military controls remains a well-guarded secret, but it's safe to say it is by far the single biggest player. Fauji Fertilizer Co. was one of Pakistan's most profitable companies in 2000, earning $44 million on sales of $170 million. Outside of the Fauji network, Askari Commercial Bank, controlled by the Army Welfare Trust (AWT), is the country's largest private bank in terms of assets and profits. Military companies enjoy access to prime real estate, easy bank credit, and tax breaks, and routinely beat out civilian companies in bidding for contracts.

Started in 1947 with a $3.6 million endowment from the departing British colonial administration to provide for the needs of World War II widows and their families, the Fauji Foundation remained a modest institution until the late 1970s, when it started expanding aggressively. Using money made by its 20 companies, the foundation spends $18 million a year running some of Pakistan's best hospitals and schools. For all that, Fauji Foundation Secretary Brigadier (retired) Mumtaz Hussain denies that his group has any special privileges. "The environment we deal with is ruthlessly competitive," he says. "If we offer better deals, we win. If we can't, we are nowhere. No crutches are available, never."

But many Fauji offshoots are in deep financial trouble. Fauji Cement Co. has lost $23 million since it began operations in late 1997, due to massive overcapacity in the cement industry and a crippling foreign debt burden, including $19 million to Britain's Commonwealth Development Corp. and $39.9 million to the International Finance Corp.

By far the biggest corporate dog is Fauji Jordan Fertilizer Co. Its plant in Sindh province was financed with a $100 million syndicated bank loan and a loan from the Export-Import Bank of the U.S. To lure investment, the Pakistan government promised to subsidize the company if fertilizer prices fell below $250 per ton. Bankers clamored to sign on. "At the time it was a golden syndication," says Askari Commercial Bank senior vice-president Nasier Sheikh. Today, prices for fertilizer made at the Sindh plant are below $200 per ton, and the government has imposed a much less generous subsidy. The Fauji Foundation has had to inject cash to keep the company afloat.

Despite their spotty record, the military foundations and other army-connected companies are generally above reproof. "If you criticize the armed forces, you are committing treason," says Rifaat Hussain, chairman of Defense & Strategic Studies at Quaid-i-Izam University. "The military is sacrosanct." Less reticent are some ex-military men. Speaking of some business debacles at the AWT, former Interior Minister and retired general Nasirullah Khan Babar says, "There should be accountability. But because [managers] are protected by the army, there are no checks."

Some ex-officers know the army is in over its head. "The army should not get involved in business," says retired Lieutenant-General Talat Masood. "We will ultimately end up like the Chinese People's Liberation Army," which was deeply involved in business until Beijing civilian leaders finally forced the PLA to divest its corporate holdings.

Nonmilitary critics worry that the system, with its free health care and top-ranked high schools and technical institutes, perpetuates a gap between the military haves and the civilian have-nots. "It's a flaw in the system," says Quaid-i-Izam University's Hussain. "It doesn't operate on the principal of equal opportunity and access." And Pakistan won't either until it stops tilting the playing field to favor the military.

By Frederik Balfour in Islamabad

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