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.

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MIM Leads the Charge...
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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.)

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...With the "Approval" of the Council of Ministers...
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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.

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...And Others Jump on the Bandwagon

BAGHDAD 00000460 002 OF 002


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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.

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Comment
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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