COMMERCE U/S LAVIN VISIT TO ERBIL

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 BAGHDAD 00000810 001.2 OF 004 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. - - - - - - - - - - - - - - - - - - - - - - - - Trade Minister: Investment Regs Will Take Time - - - - - - - - - - - - - - - - - - - - - - - - ¶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 been 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - Housing Minister: Private Investment Can Ease Shortage - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶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 BAGHDAD 00000810 002.2 OF 004 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. - - - - - - - MIM Bilateral - - - - - - - ¶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. - - - - - - - - - - - - - - - - - - - - - - - US-Iraqi Business Dialogue; Gateways to Iraq - - - - - - - - - - - - - - - - - - - - - - - ¶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. - - - - - - - - - - - - - - - Roundtable with KRG Officials - - - - - - - - - - - - - - - BAGHDAD 00000810 003.2 OF 004 ¶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. - - - - - - - - - - - - - - - - - - - - - Investment in Iraqi Kurdistan on the Rise - - - - - - - - - - - - - - - - - - - - - ¶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 BAGHDAD 00000810 004.3 OF 004 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