C O N F I D E N T I A L SECTION 01 OF 04 BAGHDAD 000810

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/07/2017
TAGS: EAID ECON EINV IZ
SUBJECT: COMMERCE U/S LAVIN VISIT TO ERBIL

REF: STATE 20072

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Classified By: Economic Minister-Counselor Daniel Weygandt for reasons
1.4 (b) and (d).


1. (C) SUMMARY. Department of Commerce Under Secretary
Franklin Lavin met with GOI officials, Kurdish Regional
Government (KRG) representatives and US and Iraqi business
leaders in Erbil Feb 19-20 to engage on economic policy and
inaugurate the US-Iraq Business Dialogue and launch the
Commercial Service's Iraqi Business Gateways initiative. The
visit was the first Commerce-led business delegation to
post-Saddam Iraq, as well as the first economic mini-summit
held outside of Baghdad with a Washington official. Lavin
discussed the importance of private sector growth and ways to
improve the climate for business in Iraq, and GOI and KRG
officials outlined a range of problems faced by the
government and private sector in Iraq. Lavin stressed the
need to develop effective implementing regulations for the
Investment Law and the importance of achieving compromise on
a hydrocarbons law, and encouraged GOI and KRG officials to
finalize one "marquee" investment in the short term to send a
positive signal to potential investors. The GOI Trade
Minister told Lavin security remains the key issue, and
offered new ideas on PDS reform, but counseled patience with
the politically sensitive issue. END SUMMARY.

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Trade Minister: Investment Regs Will Take Time
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2. (C) GOI Minister of Trade Abdul Falah al Sudani told U/S
Lavin in a bilateral meeting that security remains the key
issue confronting Iraq, and that he welcomes the increased
focus on ensuring economic growth and stability as a part of
on-going security efforts. He encourages investment in
relatively stable areas of Iraq, such as the IKR, because "we
cannot wait any longer." He stressed the importance of
reaching a compromise on drafting of hydrocarbons
legislation, noting that a draft would be submitted to the
CoM by Feb. 22.


3. (C) He noted leadership for the Investment Council had
bee

n appointed, paving the way for the development of
implementing regulations for the Investment Law, but
cautioned that it would be a slow process. Issues such as
harmonizing the law with existing legislation and
regulations, for example, would inhibit rapid progress. He
added that he understands the importance of a sound framework
for attracting investment, given that globalization has
increased competition in the market for international
capital. Sudani displayed keen interest in the International
Compact with Iraq, expressing concern over the slow progress
on the ICI, and emphasizing the need to keep regional
partners closely involved.


4. (C) Sudani characterized the PDS as his most politically
sensitive and therefore most challenging issue. The system
currently provides sufficient food for Iraq's needs, he said,
but added there is always the danger that supply problems and
delivery delays could lead to shortages. He noted that the
system is an enormous fiscal burden, and said that the system
would eventually have to change, but that the current
security environment makes it impossible to take concrete
steps toward this. He suggested a coupon-based system as a
possible intermediate step toward a monetized system, which
would give participants a limited range of choices in place
of a fixed basket of goods. He suggested, however, that
initial experiments with such a system have been negatively
received.

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Housing Minister: Private Investment Can Ease Shortage
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5. (SBU) U/S Lavin told Minister of Housing and Construction
Bayan Dazaii in a bilateral meeting that the housing sector
is central to the success of Iraq,s reconstruction efforts,
stating the availability of housing is "fundamental to the
success of a society."


6. (SBU) Minister Dizaye agreed, yet noted access to housing
in Iraq is an increasing problem. Noting that up to 80% of
Iraq,s population lacks suitable housing, Dizaye said it was
the intent of the Ministry to build up to 2.5 million new
housing units in Iraq by 2010. Outlining obstacles faced by
the housing sector ) including a weak banking system and the
lack of a mortgage market ) Dizaye nonetheless noted Iraq,s
new investment law provided a legal and regulatory framework
that would inevitably lead to foreign businesses investing in
Iraq. She also emphasized the importance of private

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investment in fulfilling Iraq's housing needs.


7. (SBU) As an initial means to promote housing development,
U/S Lavin suggested a trial initiative in five cities.
Minister Dizaye replied with enthusiasm, even suggesting a
Seven City Initiative, with a distribution of three programs
in the southern Iraq; two in central Iraq; and two in the
north. (Note: Bayan Dizaye is Kurdish, and a member of the
Kurdistan Democratic Party (KDP). End note.) Minister Dizaye
also expressed her concerns over Iraq,s Commission on Public
Integrity, noting the commission,s "politically motivated"
decisions were hampering her Ministry,s ability to carry out
its functions.

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MIM Bilateral
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8. (C) Minister for Industry and Minerals Fawzi Hariri, on
his first formal trip to Kurdistan as minister, told U/S
Lavin in a bilateral meeting that he had productive meetings
with KRG officials, including the Prime Minister and
President of the KRG. He proposed a program to share human
resources between the central government and the KRG to
enhance ties and develop skills. Hariri acknowledged the
importance of progress on hydrocarbons legislation, and said
he is hopeful a compromise can be reached.


9. (C) Hariri emphasized his commitment to the Task Force for
Business Stability Operations (TFBSO), but noted that in
addition to the $5.6M that is needed for the ten factories
identified for re-activation or assistance, $6M is being
sought for a glass factory in Anbar province. He expressed
hope that the USG would support him to obtain this funding.
(Note: GOI officials, including Deputy Prime Minister Barham
Salih, have repeatedly told emboffs that the GOI would
provide the $5.6M needed for the ten companies. End note.)
Hariri added that this funding represents the first wave,
with follow-on funds expected, and that some contracts under
the initiative had already been signed. He also reported
that the GOI intends to do a microfinance program for small
businesses, in support on the Baghdad Security Plan, and that
his ministry will be allocated $20-50M for this, with MIM
directly making the loans. This in time could evolve into a
Baghdad Business Bank.


10. (C) Hariri outlined his vision for privatization of SOEs,
saying he knows that over-employment by unproductive
companies is a drag on the budget and the economy, but is
committed to moving toward privatization while ensuring
social stability among communities with displaced workers.
He stressed that buy-in from provincial governors is
critical, and has started this effort with a recent meeting
with the governor of Basrah. He suggested that workers in
SOEs would be able to buy 10 percent of company shares when
privatized, as could members of the community where it is
located.

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US-Iraqi Business Dialogue; Gateways to Iraq
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11. (U) U/S Lavin, Trade Minister Sudani, and the other GOI
officials in attendance addressed the inaugural meeting of
the US-Iraq Business Dialogue, which included members of the
US and Iraqi business communities, as represented by the US
Chamber of Commerce, the American Chamber of Commerce in
Iraq, the Erbil Chamber of Commerce, and other Iraqi and
American business leaders.


12. (SBU) Iraq businessmen strongly urged the GOI to move
forward with privatization, for economic grounds but also
because the economic benefits would help improve the security
situation. Sudani noted that Iraq should privatize some SOEs
in time, but that a legal framework and sound plan for
assisting displaced workers were prerequisites. The group
will develop a detailed list of policy suggestions to be
submitted to the USG and GOI to improve the trade and
investment climate in Iraq. The US business representatives
left optimistic about the economic prospects of the IKR, one
planning a follow-on visit to select an additional agent.


13. (U) Lavin and Sudani, in separate events, also launched
FCS' Gateways to Iraq series of promotional events, which
provide a showcase for investment successes in Iraq, and
addressed a lunch for almost two hundred Iraqi and foreign
businessmen.

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Roundtable with KRG Officials
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14. (SBU) U/S Lavin told KRG representatives that economic
development and relative security in the Iraqi Kurdistan
Region are a foundation for further cooperation. He said the
region can become a gateway for US companies exploring
business opportunities in all of Iraq.


15. (SBU) KRG Minister of Planning Othman Shwany noted that
European and Asian firms are showing increasing interest, but
US companies are lagging behind. Muhammad Rauf, KRG Minister
of Trade, added that KRG laws against monopolies and for
consumer protection, effective company registration
nationwide, and two free trade zones all provide a good
framework for international trade and investment.


16. (SBU) Chairman of the KRG Investment Board Haresh
Muharram said the July 2006 Kurdistan National Assembly
approval of the KRG Investment Board was in line with moves
to encourage a business-friendly environment. The KRG wants
to be competitive, he stressed, and the "absence of American
companies might cause a question mark in the minds of the
Kurdish people" who consider investing. KRG Director of
Foreign Relations Falah Bakir commented that Lavin,s visit
is itself an important message to Iraqi Kurds.


17. (SBU) The IKR is safe, Bakir stressed, adding that the
greatest impediment to US commercial activity in the IKR is
the State Department Travel Warning, which does not
distinguish between the relatively safe Kurdish region and
the rest of Iraq. Bakir stressed that much more could be
accomplished if business leaders were allowed to travel to
the IKR. He pointed out that the UK, Austria, Japan, and
Denmark have all changed their advisories for the IKR.


18. (SBU) Lavin encouraged the KRG to approve the regulatory
framework for investment in support of the new KRG Investment
Law. Muharram responded that the KRG is developing
comprehensive regulations that are 50 percent completed.
Investor confidence can also be damaged by negative news,
Lavin cautioned, mentioning the recent KRG border closure
against US poultry. KRG officials were quick to note that
the KRG on Feb. 18 instructed border officials is resume
imports of US poultry, although concern remained about the
possibility of importers fraudulently labeling birds as US
origin before bringing them in from Turkey. The Erbil PRT
will follow up with additional reporting on this development.


19. (SBU) Lavin said US companies could be interested in
large scale infrastructure projects, although they are
concerned about the continuing risk of political and legal
shifts. He pointed out the lack of a billing mechanism for
water and electricity in the IKR. Muharram explained that
utilities are subsidized by the government and there is no
formula for fee collection. Shali stressed the IKR,s need
for a modern banking system and that the KRG wants a large US
bank involved, as a positive signal to others. Lavin said
providing incentives for a major hotel chain would also be
productive, and KRG officials said Kempinsky and Rotana are
already planning hotels.


20. (SBU) In a pull-aside meeting, KRG Deputy Prime Minister
Omer Fattah Hussain assured U/S Lavin that the KRG would do
its best to promote investment in the region, and requested
US assistance to move forward an $18M agreement with
Halliburton to build an electrical power plant in Chamchamal,
stressing that work has yet to commence on the project.


21. (SBU) Lavin emphasized the importance of securing a
"marquee" investment with a recognized US brand to send a
positive signal to other potential investors. Finalizing
such an event, even if it required extraordinary incentives,
would encourage other companies to take another look at Iraq
as an investment destination. It would be better, he
stressed, to have a small, successful investment in the near
term than a large one three years from now. He also
suggested setting up outreach events to AmChams in
neighboring countries to reach out to US firms already active
in the reagion, and offered FCS support.

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Investment in Iraqi Kurdistan on the Rise
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22. (SBU) The delegation meetings and associated events took
place in a context of increasing Kurdish business pride and
optimism. On February 8 the KRG Prime Minister inaugurated
the first-phase of a $1B commercial and office complex in
Erbil, using the occasion to highlight the IKR,s openness to
investment. On the eve of the visit, a CBS 60 Minutes
special aired in the US (closely reported in the IKR media),
providing a positive view of the area,s economic growth and

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the security which underpins it.


23. (SBU) Turkish money accounts for the bulk of the building
and retail boom that is underway in the IKR, and Asian and
European businesses far out-weigh the US contingent.
Nonetheless, a growing group of American and Kurdish-American
interests are advancing projects in housing and independent
power. The 400-unit, single-family home development is
significant as it represents the first instance of a foreign
private ownership of land in Iraq (made possible by the
September 2006 Regional Investment Law), the use of U.S.
building codes, integrated utilities and a pilot home
mortgage scheme. The Independent Power Producer is another
first and will help attack the second of the IKR,s three
weak points (housing, power, fuel). The next iteration of
Iraqi Business Gateways is planned for Sulaimaniyah in
spring, when another set of Iraqi, U.S. and third-country
firms will be showcased.


24. (C) COMMENT. If the participating business leaders
follow up effectively, the Business Dialogue should produce
useful policy suggestions and provide insight into the needs
of Iraqi businessmen and investors. The announcement of the
lifting of the ban on the import of US frozen chicken through
the Iraqi Kurdistan Region,s (IKR) border point was welcome
news, but revealed a lack of systematic border control
measures and consistency on nation-wide customs policy.
Minister Hariri noted that he hopes for $11.6M to start the
TFBSO program and implied that the GOI has not been
forthcoming with the $5.6M (nor the $6M that they want to
add), and that they may turn to the USG to provide it. This
would be inconsistent with both GOI pledges to provide this
funding and the principle of the GOI taking the lead on the
TFBSO in terms of funding. The KRG,s urgings that the
Department disaggregate the IKR in its Travel Warning, which
was also raised by the business leaders, merit further
consideration. END COMMENT.
KHALILZAD