SCENESETTER FOR U/S JEFFERY'S VISIT TO IRAQ

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003599

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E.O. 12958: DECL: 10/29/2017
TAGS: ECON EPET PREL PGOV IZ
SUBJECT: SCENESETTER FOR U/S JEFFERY'S VISIT TO IRAQ

Classified By: Economic Minister Charles P. Ries for reasons 1.4 (b) an
d (d)


1. (C) Welcome to Iraq. The time is ripe for senior level
economic engagement with Iraqis, as security improves in
areas like Anbar and Baghdad. It is vital that security gains
be cemented in place with jobs and investment. This will only
happen if Government of Iraq (GOI) decision makers make the
political decisions required to: cut the Gordian knot
strangling the package of hydrocarbon laws; improve the way
they formulate and spend their capital budgets to benefit all
Iraqis; attract investment by implementing investment
legislation passed over a year ago; and create an effective
mechanism to involve the international community in sweeping
economic and governance reform by standing up a fully-staffed
secretariat to support implementation of the International

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Compact with Iraq (ICI).

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Hydrocarbon Legislation
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2. (C) Your visit to Iraq will be an excellent opportunity to
press key decision-makers for action now on the stalled
hydrocarbon framework legislation. Expect most of your
interlocutors to blame others for the delay, so tackling
these issues requires a multi-faceted approach. PM Maliki has
repeatedly assured us that he has the votes needed to secure
passage of the hydrocarbon package in the Council of
Representatives (CoR),and that the leaders' agreement on
which version (the February version) to send to the CoR for
debate. However, he asserts the GOI should build a stronger
consensus on the hydrocarbon package before proceeding. Such
a stance is a recipe for procrastination. Key decision-makers
need to hear that it is time to stop quibbling about details,
since every day that passes delays much-needed investment
opportunities that would raise revenue in absolute terms for
all of Iraq.


3. (C) The Sunni Tawafuq party is also resisting decisions on
the draft legislation, arguing that Iraq,s constitutional
review will need to be completed before the oil law goes to
its first reading, because the draft law poses numerous
constitutional issues. In particular, Tawafuq says that the
law would not give a role to the CoR in reviewing contracts,
would give no real power to the Federal Oil and Gas Council,
and would give too much power to the Kurdish Region and
provinces. There also appears to be widespread misconception
that the hydrocarbon framework law, by allowing production
sharing agreements (PSAs),is "giving away" Iraq's oil
resources to international oil companies, and that Iraq would
be better off self-financing or borrowing to rebuild its
energy infrastructure.


4. (C) The Sunnis need to hear that the constitutional issues
can be worked out by minor compromises in the law itself, as
can any issues about the annexes (which are supposed to
clarify what entities will exercise control over oil
resources and which deposits count as already discovered).
Recently Tawafuq proposed the following deal: if the USG
applies strong pressure on the Kurds, and urges the Kurdistan
Regional Government (KRG) that it not enter into any more
unilateral production sharing contracts, then Tawafuq will
support passage of a hydrocarbon framework law but only after
Iraq completes its constitutional review. That's not a deal
at all. The Sunnis should be told that the core questions
have already largely been addressed in the draft legislation;
any contingent proposals simply delay national reconciliation.


5. (C) As for the KRG, passage in August of the KRG
hydrocarbon law has not helped resolve the situation, nor
have the raft of non-transparent, unilateral deals. The KRG
got a very favorable arragnement in the February 2007
hydrocarbon law draft, and KRG PM Barzani needs to be firmly
told to stop stalling and to finalize the deal to which he
agreed in February, both to maximize potential economic
returns to Iraq and to reinforce national unity. Finally, the
national government and Oil Minister Shahristani, in
particular, need to stop sniping at the KRG and Barzani, and
to stop trying to walk back the February compromise (by
putting into question the ability of regions to conclude
PSAs). Shahristani needs credibility in international oil
markets to attract companies to tackle the exploration,
development and refining tasks in the rest of the country.
The sooner the grand bargain is booked, the better for the
Ministry of Oil and the establishment of an Iraqi National
Oil Company (INOC) as well.

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GOI 2008 Budget
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6. (C) You may wish to take the opportunity of your visit to

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engage Finance Minister Bayan Jabr on issues related to the
2008 budget. Septel will describe the Ministry of Finance's
(MoF) 2008 budget proposal in more detail. In general,
however, it is based on a conservative estimate for oil
export revenues. It limits security sector (Ministries of
Defense and Interior) spending to 8.2 billion USD, an 11
percent increase in dollar terms but inadequate to the
security challenges the nation faces. On the capital budget,
the MoF's proposal accords a 20 percent increase to the
provinces, but slashes allocations for slow spending
ministries (like the Ministry of Oil) and the KRG. (The KRG
cuts will likely be restored in the CoR.) The 2008 budget
season is slightly behind schedule. The Council of Ministers
needs to approve a draft budget to send to the CoR soon to
ensure the CoR has sufficient time for debate. For the 2007
cycle, the CoR only approved the budget in early February,
truncating a significant portion during which ministries and
provinces could otherwise have spent executing their
allocations.

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International Compact with Iraq
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7. (C) During your meeting with DPM Barham Salih, you should
ask when he will announce a permanent Iraqi head of the ICI
Secretariat, staff it with Iraqis, and about the performance

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of ICI sectoral working groups (SWGs). Dr. Barham has been
unwilling to release his grip on the Compact process, but
with his staff already taxed to the limit and little
implementation since the ICI May 2007 signing, he might be
better-served ceding overall control to PM Maliki's office,
whose staff has the authority to foster ICI ministerial
cooperation in the SWGs, in particular. Without sustained
engagement and another less preoccupied Iraqi champion, the
ICI implementation will remain sluggish. At a minimum, with
several ICI benchmarks contingent on passage of legislation
in the CoR, you may wish to highlight the Compact process to
interlocutors in the CoR.

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Joint Economic Commission
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8. (C) You should raise with Iraqi policy makers the idea of
holding a Joint Economic Commission. DPM Barham Salih told us
October 29 that he wanted to organize such a meeting before
the end of the year, but it is unlikely he has yet done any
missionary work with his cabinet colleagues. Potential
deliverables could include: a memorandum of understanding on
U.S. support for Iraq's development of a national energy
strategy; a memorandum of understanding on U.S. support for
Iraq's development of a privatization strategy; a memorandum
of understanding on U.S. support for technical assistance for
COSIT modernization; agreement on expanded Iraqi exploitation
of U.S. Generalized System of Preferences (GSP) benefits; a
first meeting of the U.S.-Iraq Council on Trade and
Investment as agreed to in the TIFA agreement signed at the
last JCRED in 2005. To get all this done will require a
preparatory working group.

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Beyond the Green Zone
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9. (C) During your visit we will take you out of the Green
Zone to see the revival of key Baghdad neighborhoods and
markets with the surge. We also look forward to your travel
to Kirkuk, Erbil and Basra. This will give you a real sense
of the beyond-Baghdad economic and political situation.


10. (C) In that connection, of course, your visit
unfortunately coincides with a period of heightened tension
with Turkey over the PKK issue. This will be particularly
acute in the North. We will brief you on the latest state of
play on this unfolding issue upon your arrival.
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