MINISTRIES PURSUE AD HOC PRIVATIZATION (OR IS IT

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000460 SIPDIS SIPDIS E.O. 12958: DECL: 02/14/2016 TAGS: ECON EFIN EINV KPRV PGOV PREL IZ SUBJECT: MINISTRIES PURSUE AD HOC PRIVATIZATION (OR IS IT REHABILITATION?) PLANS Classified By: Economic Minister Counselor Tom Delare for reasons 1.4 ( b) and (d). ¶1. (C/REL GBR AUS) Summary. Various Iraqi ministries are leading initiatives to privatize state-owned enterprises. Recently endorsed by a Council of Ministers order, these initiatives (of which the Ministry of Industry and Minerals' plan to sell two cement companies is the most-developed) are at various levels of planning. With current plans allowing the state to retain controlling rights over companies and with private investors accepting the liability of funding a redundant workforce, it is unclear whether any investors will express interest. It is clear, however, that ministries are unwilling to wait until the government develops the political will to create a central privatization agency with uniform rules. End summary. -------------- MIM Leads the Charge... -------------- ¶2. (C/REL GBR AUS) The Ministry of Industry and Minerals (MIM),Ministry of Trade (MoT),and the Ministry of Housing and Construction (MoCH) have all expressed interest in increasing private sector ownership or investment in their state-owned enterprises (SOEs). MIM, which owns the majority of Iraq's 192 SOEs, has taken the lead with an "experimental plan" to create joint stock companies out of six SOEs and two SOE-owned factories chosen primarily for their attractiveness to foreign investment and potential profitability. With the current high demand in Iraq for cement, MIM is focusing particular attention on two cement factories in Kufa (near Najaf) and Sinjar (in Ninewah province),and has already drafted valuation studies and a proposed conversion plan. ¶3. (SBU) MIM's plan calls for the government to retain at least 15 to 24 percent ownership of the cement factories after the sale, with 25 to 40 percent going to a strategic partner and up to 15 percent sold to ministry and cement company employees. It restricts workforce restructuring (a crucial issue that any real privatization plan must address) by guaranteeing that all employees in both factories will retain their jobs and that workforce reductions will only be conducted through staff retirements and resignations. The sale of Kufa and Sinjar will not effect the SOE status of their parent companies, the Northern and Southern Cement State Companies. An integral part of MIM's plan is to attract foreign investment via the sale of cement company shares on the Iraqi Stock Exchange; however, foreign investment on the stock exchange will not be available until automation is complete in late 2006. (Note: This raises the issue of whether MIM adequately coordinated their plan with other government agencies. End note.) -------------- -------------- ...With the "Approval" of the Council of Ministers... -------------- -------------- ¶4. (SBU) An inter-ministerial committee convened in August 2005 to study the privatization and submitted a report to the Council of Ministers (CoM) at the end of October. Comprised of the Ministers of Planning and Development Cooperation, Industry and Minerals, and Finance, the committee put forward ten recommendations, the most important of which advocated the comprehensive, centralized "rehabilitation" of SOEs via a central agency to be created by new legislation. ¶5. (SBU) At the same time, however, the inter-ministerial committee embraced MIM's "experimental plan" and recommended other ministries look into similar SOE restructuring pursuant to existing laws, recognizing perhaps that, politically, it would take some time for a new privatization law to be passed and a functioning central agency to be established. (Note: Current Iraqi Law 22 of 1997 on State Companies, Articles 35 and 36, allows for the conversion of a state company into a joint stock company upon approval by the CoM after presentation by the ministry of a financial and technical evaluation of the proposed conversion. End note.) ¶6. (SBU) On December 18, the CoM issued an order accepting the inter-ministerial committee's recommendations for a central "rehabilitation" agency, but also perversely included an endorsement of MIM's "experimental plan." MIM is currently redoing its valuation report of the cement factories for consideration by the CoM. -------------- ...And Others Jump on the Bandwagon BAGHDAD 00000460 002 OF 002 -------------- ¶7. (C/REL GBR AUS) While MIM is in the lead with regard to ministry-led SOE reform, other ministries are beginning to follow suit, as fiscal disciplines imposed by the Ministry of Finance force ministries to look for new ways to shrink overhead. In the past month, the Ministry of Trade created a working group chaired by the Director General for Private Sector Development, Abdul Hadi al-Hamiri, to oversee the privatization of MoT's State Company for Shopping Centers. According to Hamiri, the MoT is looking at all options under existing law, but he acknowledged that the problem of what to do with excess workers would be a major obstacle. Similarly, the MoCH has looked at privatization but is reluctant to pursue it until the government implements a comprehensive plan to deal with redundant workers. In the interim, the MoCH has leased several asphalt plants (and is in the process of developing tenders to lease more) to private companies that rehabilitate the plants, operate them for five years, and return them to the ministry. However, interest in privatization at MoCH is increasing as it struggles to find a way to keep its 15 SOEs with a total of over 9,000 employees afloat. -------------- Comment -------------- ¶8. (C/REL GBR AUS) The CoM's endorsement of both a central "rehabilitation" agency and individual ministry initiatives have left it unclear whether the GOI is committed to a comprehensive plan for genuine privatization. Beyond the troubling use of the word "rehabilitation" in place of "privatization," the endorsement of MIM's plan means that ministries can pursue privatization at their own pace, although it does not compel them to initiate a program. ¶9. (C/REL GBR AUS) With 192 SOEs employing an estimated 510,000 people, according to World Bank estimates, the budget currently running at a deficit, and oil revenues down approximately 700 million dollars in the first six weeks of 2006 alone, the GOI can ill afford to turn its back on the issue of privatization. However, the unanswered questions are many. Will these initiatives attract any interested purchasers? If it occurs, will the transfer of ownership occur in a transparent manner? How will these ad hoc plans deal with the larger issue of redundant employees, or impact central government subsidy reform or social safety net plans? What, if anything, will compel ministries to coordinate with other government agencies? These are questions that the Embassy is working upon as we urge the GOI to make this process less of a means to keep SOEs on life support and more a means to push the Iraqi economy into the market. KHALILZAD