MIM DEPUTY MINISTER LOOKS BACK TO THE FUTURE

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002716 SIPDIS SIPDIS E.O. 12958: DECL: 07/26/2016 TAGS: ECON EINV ETRD KPRV POL PREL IZ SUBJECT: MIM DEPUTY MINISTER LOOKS BACK TO THE FUTURE Classified By: EconMinCouns Delare for reasons 1.4 (b) and (d). ¶1. (C) Summary: In a July 24 meeting Deputy Minister Sami Araji of the Ministry of Industry & Minerals (MIM) said that a new investment law should pass the Council of Representatives (CoR) in September or October of this year. He also said a draft privatization law is waiting for Council of Ministers (CoM) action, but that he has already proposed the CoM approve privatizing state-owned enterprises (SOEs) under existing laws. He argued that "rehabilitating" other SOEs prior to privatization will serve a number of useful purposes: maintaining income for present employees for the immediate future and boosting the value of the properties to increase their sales price. He noted that the GOI is examining how other Arab nations deal with enforcement of the Arab League boycott in order to avoid "hurting their own development" by excluding foreign firms entering their markets. He also noted that it might take three years for Iraq to complete the WTO accession process. End summary. -------------- DRAFT GOI INVESTMENT LAW -------------- ¶2. (SBU) New Econ Deputy and Econoffs called upon Dr. Sami Araji of the Ministry of Industry & Minerals (MIM) to follow up on earlier discussions with MIM during the visit of Secretary of Commerce Gutierrez. Dr. Sami fully supports the SIPDIS Investment Law currently in the CoR as key to developing the private sector, improving economic growth, and creating jobs. He added that the law will provide rights or guarantees to "strategic" investors who are interested in doing business in Iraq. He predicted that the investment law would pass by October. -------------- -------------- STATE-OWNED FIRMS: WHY PRIVATIZE WHEN YOU NEED TO CREATE JOBS? -------------- -------------- ¶3. (C) Dr. Sami said he fully supports transitioning Iraq to a private-sector economy, but described Iraq's public sector as the best creator of jobs right now because the private sector is still "too weak." He stressed the need to "rehabilitate" the MIM's SOEs to get people working (including people fired from SOEs by Saddam),to increase the value of the SOEs, and to stimulate Iraq's economy. He believes the GOI would need $2 billion for this task and said that he was in discussion with the Ministry of Finance (MoF) to enable Iraqi banks to provide these funds, although he noted that the MoF has a great many problems itself now. ¶4. (C) When queried about privatizing Iraq's SOEs, Dr. Sami said that a draft privatization law was submitted to the CoM in March of this year, but the CoM has not acted on it. As part of the draft law, he said the GOI would retain at least 15% ownership in each privatized SOE, to be sold on the stock market at an opportune time. The remainder of each SOE would be sold to a strategic investor (45%) (who could be a foreign investor),other interested investors (25%),and SOE employees (15%). It is unclear why MIM wants to maintain 15% ownership in its SOEs. When queried on this late last year, Taha I. Mohammad, advisor to the Minister at MIM, said: "The public is not ready for the government to completely exit the scene yet." The reality is more likely that the MIM is not ready to completely relinquish control in Iraq's economy. ¶5. (C) Dr. Sami related that in October 2005 he had proposed to the Council of Ministers (CoM) of the time that nine SOEs be privatized under law #22, but that the CoM failed to act for "political reasons." He has therefore resubmitted the proposal to the present CoM and hopes it will act. (Note: Though Dr. Sami is comfortable with Law #22, we believe it lacks a transparent process for privatization and an internationally accepted method for valuing Iraq's SOEs. Privatizing under existing Iraqi law could open the door to a corrupt process, something we have repeatedly told relevant Iraqi interlocutors. End note.) -------------- ARAB LEAGUE BOYCOTT -------------- ¶6. (C) Econoffs also called Dr. Sami's attention to the problems the Arab League Boycott (ALB) has created for foreign investors trying to enter Iraq. He was aware of Pepsi's problems inhibiting its investment plans. Econoff noted that ABRO Industries has also been unable to register its trademarks with the MIM's Trademark Office. (Both U.S. companies have been unable to receive their trademark certification because the Trademark Office at the MIM asked them to sign an Arab League Boycott declaration as part of their registration.) The Deputy Minister responded with a standard GOI answer, namely that the GOI is working on the BAGHDAD 00002716 002 OF 002 issue, and that the CoM will conduct a "review" on how other Arab countries handle the problem to ensure foreign investment and trade does not suffer. Dr. Sami did flag, however, the importance of protecting intellectual property rights as a requirement for Iraq in its efforts towards WTO accession. -------------- ANTI-DUMPING LEGISLATION AND WTO ACCESSION -------------- ¶7. (SBU) Regarding Iraq's progress towards WTO accession, Dr. Sami Araji predicted that it would take Iraq three years to complete the process, but noted this observation was just his personal opinion. He also brought up anti-dumping legislation that he said is with the Council of Ministers for review as a necessary measure to protect Iraq from other countries that may want to dump cheap products on the Iraqi market. Dr. Sami raised several times the need to "protect the Iraqi investor." -------------- COMMENT -------------- ¶8. (SBU) In this latest discussion, Dr. Sami reprised the points he made to Commerce Secretary Gutierrez during his recent visit. As should be evident, there is little interest at MIM in disrupting the job creation machinery of the SOEs -- even as uncompetitive and uneconomic as they are. We are left puzzled as to whether he really believes foreign investors could be enticed to "rehabilitate" Iraqi SOEs under the sort of terms for "privatization" that he has put forward. EconCounselor recently observed to him that he appeared to be intent on following some of the worst models of East European experience as he wrestled with privatization. To that Dr. Sami answered that they would avoid the mistakes made by the Russians. Our verdict: little vision at MIM. Pressure for change will have to come from other sources. Regarding ALB, we are being kept in a holding pattern. Given the current international situation, our interlocutors simply see this issue as radioactive -- even if they are persuaded as to the harm that continuing adherence to boycott measures may be doing to beneficial investment and trade prospects. SCOBEY