MESOPOTAMIA SEED AND IRAQ'S PRIVATIZATION CONUNDRUM

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002375

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/05/2016
TAGS: EAGR EAID ECON ELAB ETRD IZ KIPR
SUBJECT: MESOPOTAMIA SEED AND IRAQ'S PRIVATIZATION CONUNDRUM

Classified By: Charge d'Affaires David M. Satterfield for reasons 1.4 (

b) and (d).


1. (C) SUMMARY: Iraq's Mesopotamia State Company for Seeds
(MESO) exemplifies the GOI's main challenges in privatizing
its state-owned enterprises (SOEs). MESO employs a large
number of unskilled workers who would be displaced by any
privatization effort; it heavily relies on subsidized inputs;
and it possesses poor facilities infrastructure. MESO
management supports gradual privatization via
"rehabilitation." Embassy representatives told their
management that Iraq needs an effective privatization law
before undertaking privatization efforts (including
"rehabilitation") and that strong intellectual property
rights (IPR) protections are necessary to encourage
investment in Iraq's seed sector. We are encouraging the GOI
to create such laws, identify SOEs suitable for
privatization, and develop a strategy for protecting workers.
In addition, we will suggest to the Minister of Agriculture
that he make land reform and the privatization of seed
distribution strategic priorities. END SUMMARY.

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Unintended Consequences
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2. (C) MESO is a Ministry of Agriculture SOE that sells
mainly wheat, barley, maize, clover, and pulse seeds to Iraqi
farmers at subsidized prices. Dr. Aziz Shamkhi Jabur,
Director General of MESO, told us June 20 that he supports
privatizing MESO "step-by-step." Aziz told us that his main
concern about privatization is the large number of MESO
workers who would be displaced. According to Aziz, MESO
currently employs 450 people at its 19 factories, but it only
needs 150 employees -- a system he termed "masked
unemployment." Aziz told us that MESO employs 85 agronomists
and 80 engineers, with most of the remaining employees having
few skills that could be taken into the private marketplace.


3. (C) The displacement of SOE workers is likely the greatest
privatization challenge that the GOI faces. USAID's Private
Sector Growth and Employment Generation Program (Izdihar)
estimates that Iraq's SOEs employ 600,000 people, or
approximately 9 percent of Iraq's workforce. Under a
successful privatization initiative, Izdihar estimates that
the GOI would displace approximately 360,000 of its SOE
employees. The GOI's current policy of ramping up SOE hiring
(at least 70,000 so far this year),while in some minds
alleviating unemployment tensions, may also serve to swell
the numbers of displaced workers under privatization, or even
add to hesitations about privatization.

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Rehabilitation at the
Expense of Privatization
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4. (C) Director Aziz claimed that the poor condition of
MESO's facilities also would hinder privatization. The SOE
currently requires $12 million for annual repairs and
maintenance, he said, and then asked, "Who would be willing
to invest in such a company?" (NOTE: According to a January
2004 study by USAID's Agriculture Reconstruction and
Development Program for Iraq (the most recent available),
MESO's 2002 revenues were just over $33 million. However, we
do not have an accurate accounting of MESO's operating costs,
nor do we have historical information on the SOE's
performance, so it is hard to determine the ramifications of
$12 million in annual maintenance and repair outlays. END
NOTE.) Director Aziz told us that the best way to privatize
MESO is to first "rehabilitate" its 19 factories to a
condition that foreign investors might be willing to accept.
Only then, he predicted, could the factories be sold to
create competition gradually against MESO's remaining
state-owned factories.


5. (C) Director Aziz's comments mirror those of other GOI
officials who view "rehabilitation," or the rebuilding of
Iraq's SOE infrastructure, as a necessary first step before
privatization. Many of these officials, however, also
envision the state maintaining a significant share of
ownership as part of any privatization outcome. We have made
clear to these officials our opinion that this is a distorted
view of privatization. GOI officials who support
"rehabilitation" are likely using it as a delaying tactic
against privatization. It is highly possible that these
officials would rather maintain ownership of "rehabilitated"
profitable SOEs -- using them as revenue generators for
political or personal purposes -- than sell them to private
sector investors, after which the long-term cash flows would
disappear.

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Subsidy Reliance
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6. (C) According to Director Aziz, another hindrance to
privatizing MESO is that Iraqi farmers likely will resist
paying unsubsidized seed prices. As an example, he explained
that MESO typically pays about $500 per metric ton of wheat
seed, mostly to Turkish suppliers, which it then sells to
Iraqi farmers for about $300 per metric ton. The Ministry of
Agriculture makes up the difference. (NOTE: Prices paid to
foreign suppliers and charged to Iraqi farmers vary depending
on the quality of the seed. END NOTE.) MESO also relies
heavily on subsidized fuel and electricity prices. This
heavy reliance on subsidies is typical of Iraq's SOEs.
Without discounted inputs and, in many cases, a guaranteed
market of SOE buyers, most of Iraq's SOEs could not operate
profitably.


7. (C) The average Iraqi farmer, besides being "addicted" to
subsidies after decades of entitlement, is probably
hard-pressed to afford unsubsidized seed prices. Many Iraqi
wheat farms do not have a high productivity per unit of land
compared with neighboring countries' wheat production. Iraqi
wheat production per hectare averages about one metric ton;
neighboring countries produce over twice as much per hectare.
This low productivity, together with Iraq's smaller-scale
wheat farming operations, makes it difficult for Iraqi wheat
farmers to enjoy profitable enterprises. Even at the current
price of $305 per metric ton paid by the Ministry of Trade
for high-grade wheat (which is 53 percent higher than the
average international freight-on-board market price),many
Iraqi wheat farmers might be having difficulty achieving
profitability.

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Land Reform and Seed Vouchers?
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8. (C) Embassy believes that if the MoA were to institute
effective policies to alleviate farmers' productivity
problems, it could result in an easier privatization process
for seed distribution. For example, under current Iraqi law,
the vast majority of farmers lease their land from the
government and are unable to contract with other farmers to
buy or sell land. If the GOI were to reform land ownership
laws so farmers could buy or sell, Iraqi farmers could
consolidate land holdings and improve their chances of
profitability. Over time, farmers could afford to pay higher
prices for seed, and if private-sector distributors were
encouraged to enter Iraq's market, farmers could procure a
wider variety of seeds than what is currently offered by the
MoA. Paralleling the voucher program already in existence in
the fuel-supply sector, the MoA could even develop a "seed
voucher" system. Farmers would use the vouchers to procure
seed. By honoring these vouchers at both private-sector
distributors and its SOEs,
the MoA could encourage private-sector growth and at the same
time prepare MESO and the other seed-distribution SOEs for
privatization. This type of program could also make Iraq's
agriculture sector more efficient by giving farmers a greater
variety of seed and services to choose from and, as a result,
a chance to make better use of their available natural
resources of land, water, and climate.

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A Transparent Government Exit
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9. (C) MESO exemplifies the problem with privatization in
Iraq. We explained to Director Aziz that the GOI first needs
to pass a law that ensures fair and transparent
privatization, including the creation of an independent
agency to oversee the process. (NOTE: Up to now, the GOI has
not pushed privatization legislation aggressively, but it has
been seeking foreign investors to help rebuild its SOE
infrastructure. END NOTE.) We also explained that a
necessary complement to a privatization law would be the
creation and enforcement of effective intellectual property
rights (IPR) laws to enhance the potential for investment in
Iraq's seed sector; foreign seed companies will not invest in
Iraq if the GOI does not actively enforce IPR protections.
At the same time, it is necessary for the GOI to start
determining which of its approximately 192 SOEs potentially
could thrive under private management. Without such a
prioritized list, the privatization process would probably be
inefficient.

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The Labor Dimension

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10. (C) Post also believes that the GOI must develop a
strategy to deal with the ramifications of full privatization
on the labor market. One potential solution could be to
expand Iraq's new Social Safety Net program administered by
the Ministry of Labor and Social Affairs. However, monetary
benefits under the current program typically would be about
one-third of an SOE employee's current income. It is
possible that Iraq's new pension law also could help
alleviate the dilemma of displaced SOE workers, pulling those
of retirement age out of the labor pool. However, this
option in its current form promises to be a serious drag on
the GOI budget. Yet another solution, as developed by
USAID's Izdihar, is to offer payout packages to SOE employees
based on salary grade and the income that would have been
earned between the time of resignation and the time when the
employee would have faced compulsory retirement. This too
has large budgetary costs that are currently unsustainable.
The long-term solution to the displacement of SOE workers
under privatization is jobs generated by private-sector
development. We will encourage the GOI to take the necessary
steps to protect the displaced workers of privatization,
especially by encouraging private-sector growth initiatives.
SATTERFIELD