In the weeks since Egypt’s military deposed President Mohamed Mursi
on July 3, the Obama administration has walked a tightrope over how to
respond. Most of all, President Obama has been careful not to label
what happened a coup,
which would trigger cuts to the long-standing military aid the U.S. gives to Egypt. On Thursday the administration gave itself some breathing room, declaring the U.S. is not legally required to determine if Mursi’s ouster counts as a coup, which allows aid to keep flowing. Yet in a move that acknowledges the current chaos there—Mursi remains in military custody and is now under investigation for murder and kidnapping—the Pentagon has announced it’s delaying delivery of four F-16 fighter jets to Egypt.
Although it’s too early to say whether the delay is evidence of a broader shift in the administration’s consideration of the $1.3 billion in military aid the U.S. sends to Egypt every year, pressure to reevaluate the arrangement is mounting from both parties. On July 8, Arizona Republican Senator John McCain issued a statement saying that suspending military aid to Egypt was “the right thing to do at this time.” On Thursday, Vermont Democratic Senator Patrick Leahy told the Washington Post that Egypt’s long-term military aid contracts have “gotten us into a situation where we are mortgaged years into the future for expensive equipment.”
The problem is that even if the U.S. wanted to cut military aid to Egypt, it would be hard to do so without incurring millions of dollars in default penalties. The structure of the aid package—involving cash flow financing, multiyear contracts with potentially steep default fines, and American manufacturing jobs guarded by powerful defense lobby interests—has backed the U.S. into a corner.
Take those four delayed F-16s. They’re part of a $2.5 billion (PDF) multiyear deal signed with Lockheed Martin (LMT) in 2010 to deliver a total of 20 planes by December 2014. Lockheed says that through June 30 it had delivered 14 of the 20 F-16s. According to data compiled by Bloomberg Government, the U.S. has committed $797 million toward that contract through April, leaving the U.S. potentially liable for the remaining $1.7 billion, says Cameron Leuthy, an analyst specializing in government contracts with Bloomberg. In the event that the U.S. does cut aid to Egypt, it would have to negotiate a termination penalty with Lockheed, reimbursing the contractor for costs incurred and a reasonable profit.
“That’s what makes this relationship so inflexible and so difficult for the United States to make any changes,” says Michele Dunne, director of the Atlantic Council’s Rafik Hariri Center for the Middle East. “We want to continue to have a military and security relationship with Egypt, but we need to renovate this relationship to be more flexible, frankly, for the U.S. to have the ability to suspend assistance if we decide we need to.”
The Pentagon refused to comment when asked for an estimate of the value of the potential outstanding termination penalties.
Since 1979, Egypt has been the second-largest recipient of U.S. foreign assistance after Israel. The U.S. has given Egypt $1.3 billion in military aid every year since 1987. According to a June 27 report (PDF) by the Congressional Research Service, those funds have been deposited into an interest-bearing account in the Federal Reserve Bank of New York each year since 2000. Although the funds must be spent in full every year, Egypt’s military is allowed to negotiate major arms purchases with U.S. suppliers with spending that gets spread out over multiple years. Israel is the only other country with the same setup.
One of the longest-standing aid arrangements between Egypt and the U.S. involves the delivery of tanks made by General Dynamics (GD). Since 1988, Egypt has helped manufacture 1,255 of the company’s M1A1 Abrams tanks, paid for entirely with U.S. aid. Most of the tank parts are made in a General Dynamics factory in Lima, Ohio, and then shipped to Egypt for assembly. A smaller number of parts are produced at a plant on the outskirts of Cairo.
In November 2011, General Dynamics was awarded a $395 million contract to deliver 125 tank kits to Egypt. The contract runs through January 2016. According to Bloomberg Government data, as of April, General Dynamics had received only $176 million for the contract—meaning the U.S. could potentially be on the hook for as much as $220 million if the contract has to be terminated because of cuts in future Egyptian military aid. General Dynamics declined to comment.
Not all contracts with Egypt pose potential termination fees. Many more are smaller and already paid for. For example, the day before Mursi was ousted, Pennsylvania-based DRS Radar Systems signed an $8.1 million multiyear deal to provide Egypt with a border surveillance system. In April, L-3 Communications (LLL) signed a $10.5 million contract for digital radio transceivers. According to Bloomberg Government data, both of those contracts have already been paid for, so there are no risks for termination penalties should future aid be slashed.
Even so, the U.S. risks damaging its relationship with the Egyptian military if it cuts future aid. “The fact of the matter is that the last bit of leverage we have is through our relationship with the military,” says Dov Zakheim, who served as undersecretary of Defense under President George W. Bush. “If we terminate those contracts, the resentment that would trigger in the military would be irreversible. They would never forgive us.”
Significant cuts to Egyptian aid would also deal a blow to U.S. defense contractors needing to boost sales to foreign governments to offset deep cuts in U.S. military spending. The U.S. Government Accountability Office, in a September 2012 report looking at the sales of tactical wheeled vehicles such as Humvees, said that while sales to foreign governments aren’t likely to offset declines in sales to the Pentagon, “foreign sales may be more important to the industrial base now more than ever.”
In the past, the U.S. defense lobby has made a full-court press to keep Egyptian aid flowing, regardless of the political circumstances in Cairo. “I think they totally drive the policy of continuing U.S. military aid to Egypt,” says Shana Marshall, associate director of the Institute for Middle East Studies at George Washington University. “Executives in companies see this as a major component of their business plan, and they’re not willing to let the program end.”
The complicated nature of the military aid has hindered past efforts to change the way it’s structured. Even when the Egyptian government cracked down on U.S.-funded nongovernmental organizations in Egypt last year, shuttering their offices and issuing arrest warrants for American and Egyptian staffers, the Department of State allowed aid to keep flowing. A trial went ahead in Cairo, and the media was flooded with pictures of Egyptian NGO workers and the lone American citizen who did not flee the country sitting in a cage during court proceedings. At the time, according to Stephen McInerney, executive director of the Project on Middle East Democracy, the Pentagon, along with defense contractors and manufacturing companies, flexed their lobbying muscle on the Hill and sent lawmakers “alarmist worst-case scenarios,” which he says exaggerated the consequences for the U.S. economy if Egyptian aid was cut off. Contractors “very clearly did have an impact on the Hill at that time. I would say that almost ended the debate last March,” McInerney says. “It’s clear that the industry has a lot of influence.”
which would trigger cuts to the long-standing military aid the U.S. gives to Egypt. On Thursday the administration gave itself some breathing room, declaring the U.S. is not legally required to determine if Mursi’s ouster counts as a coup, which allows aid to keep flowing. Yet in a move that acknowledges the current chaos there—Mursi remains in military custody and is now under investigation for murder and kidnapping—the Pentagon has announced it’s delaying delivery of four F-16 fighter jets to Egypt.
Although it’s too early to say whether the delay is evidence of a broader shift in the administration’s consideration of the $1.3 billion in military aid the U.S. sends to Egypt every year, pressure to reevaluate the arrangement is mounting from both parties. On July 8, Arizona Republican Senator John McCain issued a statement saying that suspending military aid to Egypt was “the right thing to do at this time.” On Thursday, Vermont Democratic Senator Patrick Leahy told the Washington Post that Egypt’s long-term military aid contracts have “gotten us into a situation where we are mortgaged years into the future for expensive equipment.”
The problem is that even if the U.S. wanted to cut military aid to Egypt, it would be hard to do so without incurring millions of dollars in default penalties. The structure of the aid package—involving cash flow financing, multiyear contracts with potentially steep default fines, and American manufacturing jobs guarded by powerful defense lobby interests—has backed the U.S. into a corner.
Take those four delayed F-16s. They’re part of a $2.5 billion (PDF) multiyear deal signed with Lockheed Martin (LMT) in 2010 to deliver a total of 20 planes by December 2014. Lockheed says that through June 30 it had delivered 14 of the 20 F-16s. According to data compiled by Bloomberg Government, the U.S. has committed $797 million toward that contract through April, leaving the U.S. potentially liable for the remaining $1.7 billion, says Cameron Leuthy, an analyst specializing in government contracts with Bloomberg. In the event that the U.S. does cut aid to Egypt, it would have to negotiate a termination penalty with Lockheed, reimbursing the contractor for costs incurred and a reasonable profit.
“That’s what makes this relationship so inflexible and so difficult for the United States to make any changes,” says Michele Dunne, director of the Atlantic Council’s Rafik Hariri Center for the Middle East. “We want to continue to have a military and security relationship with Egypt, but we need to renovate this relationship to be more flexible, frankly, for the U.S. to have the ability to suspend assistance if we decide we need to.”
The Pentagon refused to comment when asked for an estimate of the value of the potential outstanding termination penalties.
Since 1979, Egypt has been the second-largest recipient of U.S. foreign assistance after Israel. The U.S. has given Egypt $1.3 billion in military aid every year since 1987. According to a June 27 report (PDF) by the Congressional Research Service, those funds have been deposited into an interest-bearing account in the Federal Reserve Bank of New York each year since 2000. Although the funds must be spent in full every year, Egypt’s military is allowed to negotiate major arms purchases with U.S. suppliers with spending that gets spread out over multiple years. Israel is the only other country with the same setup.
One of the longest-standing aid arrangements between Egypt and the U.S. involves the delivery of tanks made by General Dynamics (GD). Since 1988, Egypt has helped manufacture 1,255 of the company’s M1A1 Abrams tanks, paid for entirely with U.S. aid. Most of the tank parts are made in a General Dynamics factory in Lima, Ohio, and then shipped to Egypt for assembly. A smaller number of parts are produced at a plant on the outskirts of Cairo.
In November 2011, General Dynamics was awarded a $395 million contract to deliver 125 tank kits to Egypt. The contract runs through January 2016. According to Bloomberg Government data, as of April, General Dynamics had received only $176 million for the contract—meaning the U.S. could potentially be on the hook for as much as $220 million if the contract has to be terminated because of cuts in future Egyptian military aid. General Dynamics declined to comment.
Not all contracts with Egypt pose potential termination fees. Many more are smaller and already paid for. For example, the day before Mursi was ousted, Pennsylvania-based DRS Radar Systems signed an $8.1 million multiyear deal to provide Egypt with a border surveillance system. In April, L-3 Communications (LLL) signed a $10.5 million contract for digital radio transceivers. According to Bloomberg Government data, both of those contracts have already been paid for, so there are no risks for termination penalties should future aid be slashed.
Even so, the U.S. risks damaging its relationship with the Egyptian military if it cuts future aid. “The fact of the matter is that the last bit of leverage we have is through our relationship with the military,” says Dov Zakheim, who served as undersecretary of Defense under President George W. Bush. “If we terminate those contracts, the resentment that would trigger in the military would be irreversible. They would never forgive us.”
Significant cuts to Egyptian aid would also deal a blow to U.S. defense contractors needing to boost sales to foreign governments to offset deep cuts in U.S. military spending. The U.S. Government Accountability Office, in a September 2012 report looking at the sales of tactical wheeled vehicles such as Humvees, said that while sales to foreign governments aren’t likely to offset declines in sales to the Pentagon, “foreign sales may be more important to the industrial base now more than ever.”
In the past, the U.S. defense lobby has made a full-court press to keep Egyptian aid flowing, regardless of the political circumstances in Cairo. “I think they totally drive the policy of continuing U.S. military aid to Egypt,” says Shana Marshall, associate director of the Institute for Middle East Studies at George Washington University. “Executives in companies see this as a major component of their business plan, and they’re not willing to let the program end.”
The complicated nature of the military aid has hindered past efforts to change the way it’s structured. Even when the Egyptian government cracked down on U.S.-funded nongovernmental organizations in Egypt last year, shuttering their offices and issuing arrest warrants for American and Egyptian staffers, the Department of State allowed aid to keep flowing. A trial went ahead in Cairo, and the media was flooded with pictures of Egyptian NGO workers and the lone American citizen who did not flee the country sitting in a cage during court proceedings. At the time, according to Stephen McInerney, executive director of the Project on Middle East Democracy, the Pentagon, along with defense contractors and manufacturing companies, flexed their lobbying muscle on the Hill and sent lawmakers “alarmist worst-case scenarios,” which he says exaggerated the consequences for the U.S. economy if Egyptian aid was cut off. Contractors “very clearly did have an impact on the Hill at that time. I would say that almost ended the debate last March,” McInerney says. “It’s clear that the industry has a lot of influence.”
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