Soldiers of Fortune: Without a Doubt!

Soldiers of Fortune
Newsline, December 2006

The Pakistan military is among several other armed forces in the world engaged in commercial ventures. Today, its financial empire has an approximate financial size of 200 billion rupees with military-controlled welfare foundations operating in areas ranging from banking, insurance, leasing and real estate to private security, education, airlines, cargo services, knitwear, and major agri-based industries.

These businesses denote an additional cost for the government because of the use of state assets. A number of the commercial operations of the four welfare foundations, the Fauji Foundation, Army Welfare Trust (AWT), Bahria Foundation and Shaheen Foundation, as pointed out by several reports of the auditor-general of Pakistan, use state resources without reimbursing the government. However, the military's top management continues to claim that these are purely private sector ventures that do not fall under the scope of government accountability procedures and, hence, have continued to grow as part of the military's hidden economy.

The military's economy comprises three interdependent but distinct levels. The welfare foundations represent the most visible segment. These four foundations are subsidiaries of the military, and the link is very clear. In general terms, all foundations use the logos of their parent services, and the overall management is provided by the respective service headquarters. The Fauji Foundation, on the other hand, is a tri-service organisation managed by the ministry of defence and has a system of plowing resources back into the welfare budget of the three services. These financial stakes account for about six to seven per cent of private sector assets.

According to the former governor, State Bank of Pakistan, Ishrat Hussain, the military's stakes in the private sector are about 3.6 per cent. However, the former governor's estimates do not take into account the military business complex's real estate investments. Moreover, his estimates are based on the data collected from the Karachi Stock Exchange, which does not include a number of the military's business ventures. The military's corporate empire comprises 100 projects controlled directly or indirectly by the four welfare foundations, most of which are not even listed with the stock exchange. Although these commercial ventures have ostensibly been established for the welfare of the entire armed forces, the fact is that the officer corps, especially the top echelons, are the key beneficiaries of the military's economy. The cushy jobs given to senior commanders in these foundations or other military-controlled business ventures soon after retirement generate an interest at the senior level of the military's management to maintain a foothold in power politics. It is this aspect which is most troublesome for a polity that is trying to get back on its feet. A political army's interests in remaining well-entrenched in politics become significant when it has equally significant financial stakes in staying on top of things.

The armed forces' direct or indirect involvement in the economy and its parallel control of power politics allows it access to privileged information which, in Pakistan's case, has allowed two welfare groups, the AWT and the Fauji Foundation, to become two of the largest business conglomerates in the country. Besides access to strategic economic information, these business groups have been given tax breaks as well. For instance, the Fauji Foundation was exempt from taxes during the 1960s, and the AWT did not pay any taxes until 1993, when tax was levied on it during the first regime of Prime Minister Nawaz Sharif. Even then, the trust paid fewer taxes than the Shaheen and Bahria Foundations. So much for the political influence of the army.

The military as a serious economic actor, which competes with other domestic economic players, is a phenomenon prevalent primarily in the developing world, especially in countries ridden with the problem of political underdevelopment. The armed forces of the developed world, such as in the US, France, Britain and others, also have a significant economic role, but these militaries normally piggyback on the civilian players to exploit resources in other countries rather than competing within. So, the Chinese PLA, the Thai, Pakistani and Burmese armed forces, or even the Iranian Hezbollah militia, directly depend on their political significance to exploit resources at home. In weak polities in particular, militaries are tempted to engage in economic ventures for a number of reasons, ranging from the welfare of their own personnel to filling the financial gap in order to meet their operational and personnel needs - especially when the governments cannot do so due to a resource crunch, or because the state has a poor tax base that does not allow it to generate resources - or merely to fulfill certain other objectives of the state.

Historically speaking, militaries have been engaged in commercial ventures for a host of reasons. The German military, for instance, was deeply entrenched in commercial ventures until it was defeated during the Second World War. However, a direct involvement in commercial ventures in the post-Cold War era is a phenomenon that one sees prevalent in developing countries mainly. It is also a feature in countries where the militaries were directly involved in nation-building or were people's armies, such as those in China, Indonesia, or a number of Latin and South American countries. The military in business is not a popular model in operational/professional militaries. Of course, there are exceptions such as Pakistan and Turkey.

Once one begins to look into this issue, there are clearly three models that are visible. The first model relates to cases like in China, Indonesia and many Latin American states where the military, including serving personnel, are directly involved in commercial ventures. Here, the militaries became engaged in commercial ventures as part of the politico-economic tradition whereby the armed forces were encouraged to get involved in business activities to raise their own resources or to meet budgetary gaps. In Indonesia's case, for instance, the military was consciously involved in commercial activities to meet the resource gap, even for buying military hardware. In China, this was also done to meet the shortfall in the defence budget. However, in Pakistan's case, the defence budget is completely funded by the government, which also bears the burden of over 30 billion rupees in military pensions. It is important to note that even in such cases like China and Indonesia, it was eventually realised that the military's direct involvement in commercialism was inimical to the professionalism of the institution. Hence, the Chinese armed forces were legally banned in 1998 from indulging in commercial ventures, especially in the service industry.

The second model relates to countries like Pakistan and Turkey where militaries are not engaged directly, but by proxy. This is done by running commercial activities through retired military personnel and using funds accumulated for welfare. This is a method that has been used in both Turkey and Pakistan. In Pakistan's case, the pension or the welfare fund is used to run three foundations: the Army Welfare Trust, Bahria Foundation and the Shaheen Foundation. Given the huge resources available to the armed forces as part of the post-retirement fund, the money is invested in business ventures to earn returns for those investing in the welfare scheme. This methodology also gives credence to those who argue that these ventures have no link with the military. In fact, in the view of most military personnel, the fact that these foundations and some of the businesses are run by retired military personnel does not signify that they are the corporate interests of the armed forces. Of course, what is always forgotten is that it is the political clout of the military - and the fact that it is directly involved in governance - that has a major role to play in giving these commercial ventures a big boost. Given the peculiar nature of the civil-military relations imbalance in Pakistan, there are times when contracts are granted on a preferential basis to military organisations. The entire construction workload given to the FWO and the NLC in Lahore by Shahbaz Sharif bears witness to the fact. Skeptics would argue that the contracts are obtained through competitive bidding. However, given the nature of transparency of the government, this argument is highly questionable.

The last model that was referred to earlier pertains to activities conducted in the developed world where retired military personnel set up security firms or organisations directly linked with the 'management of conflict.' These companies, like the MPRI in the US or Executive Outcomes in the UK or Sandline International of South Africa, are used indirectly by the military or the governments to pursue their security objectives in other countries or regions. A number of these companies were used in the African continent to support regimes or to bring down governments. This involvement is strictly military and is run in the fashion of the East India Company where private companies are used to protect commercial interests, such as natural resources, diamond mines, etc. However, the implications of this approach are for the polity and economy of other states rather than the country where such private organisations are registered.

Although all of these aforementioned cases are problematic, it is the military's direct and indirect involvement that is of major concern, especially for economies trying to survive. This is because in this situation money could be created or there could be an injudicious use of resources even in the corporate sector.

In many ways, Pakistan military's commercial activities represent a crossbreed between the first and the second models described. The military, in fact, seems to have adopted a two-pronged approach. First, turn public sector ventures into private ventures, hence using state capital. This pertains to operations like the National Logistic Cell and the Frontier Works Organisation, or even the military farms. These activities use state capital, but are later turned into private ventures. The second approach involves running commercial ventures through the use of welfare funds. It is through a combination of both that the military has arrived at the point where its businesses today control about 23 percent of the assets of the corporate sector, with two foundations - the Fauji Foundation and the Army Welfare Trust - representing two of the largest conglomerates in the country. This quantification does not, however, include the extent of the military's intricate network that forms its economic/commercial empire.

To even have an idea of how deep the network is, one needs to look at three distinct levels: (a) small and medium enterprises run independently by units and divisions. These businesses range from bakeries to more intensive ventures; (b) public sector large enterprises - this refers to organisations like the NLC and FWO that are run under a formal public sector set-up; and (c) large-scale private sector ventures where some or all of the capital has been drawn from the public sector. The control, definitely, is in the hands of the armed forces. For instance, the management of the foundations is connected with the service headquarters. To get an idea of the size of the private ventures, the Fauji Foundation has 21 projects, the AWT 41, Bahria Foundation 23 and the Shaheen Foundation has 11. These range from bakeries, petrol pumps and international airlines to real estate, financial services and banks.

Referring to the military's small and medium enterprises, one would like to cite the example of one recent venture started by the corps command/cantonment board Bahawalpur. In this case, the cantonment board erected a toll plaza on the main GT road and started to collect money, an action that is in contravention of the cantonment board/local bodies law. As per the rules, none of these organisations can impose a tax on a highway. Of course, the High Court rejected the plea against the decision, and one does not have to wonder why. Such ventures are carried out to make money that is then put in the regimental fund in the name of welfare, but with no accountability. There is absolutely no method to quantify the extent of such activities and the money generated through it. Unfortunately, the lack of transparency breeds corruption.

Then there are the two approaches used by the armed forces for what they term as their private sector ventures. The first relates to organisations like the Fauji Foundation that were raised by some funds from the government or those inherited from the British in 1947 as part of the welfare fund and invested in establishing commercial ventures. In this approach, the profit is used for the direct investment in welfare of retired personnel through opening schools, hospitals, training centres, etc. Since such operations are fairly independent, there is not a constant source of input from the public.

The businesses run by Fauji generate sufficient profit for the ventures to expand. However, efficient operations are not a common feature through the spectrum of the Fauji Foundation business. There are areas where the Foundation has, in the past, sought government intervention and financial help to remain afloat. The one example relates to Fauji-Jordan Cement. The operation had to be salvaged through help from Islamabad. In fact, a glance at the financial statements shows that the amount of the interest payable is so high that such establishments could be conveniently liquidated.

The other approach relates to the other three foundations where welfare money is used to establish businesses that, in turn, are used to generate profit to be paid back to the investors. These investors are the retired personnel who have invested the money in welfare schemes.

What is interesting about most of the business and industrial ventures is that the operations are in areas with high government protection or relate to high consumption items. For instance, the military's major industrial ventures are confined to sugar, fertiliser, cereal, and cement production. The idea is to restrict operations to areas that are financially less risky and bring higher dividends. This is a pattern that one finds in other areas of operations as well. Major concentration in the trade and service industry is in areas where the foundations could either benefit from business provided by the parent services or where there is a greater surety of returns. The two examples in this regard are the knitwear project of the AW and the real estate businesses of AWT, Bahria and Shaheen. The additional benefit is that land is often acquired on concessional rates due to the military's image and then sold at higher market prices. The profits are definitely visible even in cases where a service has not invested a major share of resources in a project.

The one example relates to Bahria Foundation's housing and construction project. The construction of the Bahria town in Rawalpindi and other cities is replete with stories of kickbacks to individuals. In any case, this project involves the linkage between one Mr. Riaz and the navy with the former responsible for major financial investment in the housing projects in return for using Bahria's name. The relationship was finally terminated in 2000 when Bahria Foundation transferred all shares in Bahria Town Scheme to Malik Riaz. The foundation also challenged Riaz in court for continuing to use the name Bahria. However, the court decided in the businessman's favour whose contention was that the name Bahria had become synonymous with his large housing projects, and that his business would be affected if he did not use the name and the logo. Interestingly, the court did not seem to pay attention to the laws which prohibited the use of an official logo by private companies.

It must also be mentioned here that the real estate development projects run by the three foundations are separate from the housing schemes run by the respective service headquarters. Contrary to the practice followed by foundations that procure land against a certain price, service headquarters do not pay any price for the land acquired to establish welfare housing schemes. It is only the construction price for the house or flat that is borne by the officer who has been given the property. Hence, it is not surprising to see state land previously dedicated for military purposes being consumed by such housing schemes. In Lahore cantonment alone, about 600 acres of land allocated for army exercises and other uses was arbitrarily taken and converted into housing schemes or given to officials for the paltry sum of 17 million rupees. Intriguingly, no one seems to have questioned the decision.

Today, military's economic activities can be observed in all three key segments of the economy: agriculture, manufacturing and service industries. The general principle that seems to have been followed is to expand in areas where the foundations were more assured of profits. However, having this rule does not necessarily mean that the foundations are efficient as well. Some of the military's concerns have huge operating/management costs. As for the AWT, it had to ask the government for a 5.4 billion rupee bailout in 2002. According to sources, the Nawaz Sharif government bailed out the trust through helping it with one of its foreign loans. This is highly scandalous, and certainly as scandalous as the Sharifs getting unfair concessions for the Ittefaq group. Although intriguing and understandable at the same time, the political leadership continued to support the expansion of this economic empire, treating contracts and businesses as favours that might protect a particular regime from the army's wrath. While it was not possible to achieve the perceived objective, the financial empire started to bloat as well.

Nawaz Sharif is not the only one who supported the military's business. A number of projects by the welfare foundations were sanctioned under Benazir Bhutto's government as well, with rumors of close linkages between Asif Zardari's close friends and Shaheen Foundation's management regarding the setting up of the Shaheen pay-TV and radio projects. None of the political governments raised any major objection to the military business complex during the 1990s. Moreover, there are many in the corporate sector who do not object to the military in business or even become its partners. This complacency or tacit cooperation can be explained as a by-product of the military's economic role - it tends to create clientalism. In Pakistan's elitist-authoritarian political system, which is backed by a top-down authoritarian economic model of progress and development, the political class and other key sectors seek the military's partnership for their personal gains. Since the military is a permanent actor in politics, which also keeps returning to power, other players seek to build a partnership with the GHQ or not disturb its interests to seek economic gains. Unfortunately, this perpetuates an elite model of exploitation of national resources.

The negative impacts are multi-dimensional and it is not just on the economy, but also on the profession of the military as well. It is true that one does not have a large number of serving people involved in private businesses. The bulk of uniformed people are actually in the National Logistic Cell and the Frontier Works Organisation, two organisations that have turned commercial. Both organisations were initially established to handle special projects or national emergencies, but then encouraged to do their own revenue generation. The limited number, hence, one could argue, does not put Pakistan military's ventures on par with that of China or Indonesia's. Also, one could argue that the Pakistani model is different because it does not use serving officers. However, there are two critical issues that must be understood.

First, commercial ventures, even if they do not use serving officers, do, unarguably, have an impact on the professional mindset. Senior officers, who are quite aware of the rewards that await them after retirement in terms of extension of perks and privileges as a result of jobs in these companies, tend to compromise on the quality of their work during service. It is important to note that there is no streamlined system for selecting people for appointment in these organisations.

According to a senior retired army officer, Zia used these foundations to reward people he liked, or punish those he didn't by kicking them out of the mainstream GHQ positions into the foundations. But for the majority, it is a perk that requires major compromises during their military career, especially at the top. Second, there is an element of symbolism involved here. What this means is that with the number of soldiers involved in such ventures at the unit/division/corps level, and even looking at the post-retirement benefits, a lot would view these as an extension of their power and influence. It also inculcates an attitude of grabbing financial opportunities that tends to ruin the organisational ethos. Hence, there are problems even with this, otherwise, benign model.

Finally, these are not the kind of activities that a professional/operational military ought to be getting involved in. After all, it was the sensitivity towards increasing or safeguarding the military's professionalism that lead the Chinese to force the armed forces to withdraw from it. There were other curbs that were imposed as well.

Ayesha Siddiqa is the author of the upcoming book, Military Inc, Inside Pakistan's Military Economy (to be released in April 2007)