POOR LEADERSHIP, SCARCE CAPITAL AND POWER TOP BABIL

C O N F I D E N T I A L SECTION 01 OF 03 HILLAH 000084

SIPDIS

SIPDIS

E.O. 12958: DECL: 6/6/2017
TAGS: ECON EAGR EAID EFIN EIND EINV ENRG ETRD PGOV
PREL, SOCI, IZ, IR
SUBJECT: POOR LEADERSHIP, SCARCE CAPITAL AND POWER TOP BABIL
BUSINESSMEN'S WOES; SECURITY A FACTOR TOO

REF: A) HILLAH 76 B) 06 HILLAH 150

HILLAH 00000084 001.2 OF 003


CLASSIFIED BY: Charles F. Hunter, Babil PRT Leader, REO
Al-Hillah, Department of State.
REASON: 1.4 (b),(d)




1. (U) This is a PRT Babil cable.


2. (C) Summary: In recent meetings with the PRT, representatives
of the Babil business and commercial sector highlighted the
following as key to the province's near-term economic growth:

-- Overcoming the ineffective and/or counterproductive role of
government -- particularly that of the Provincial Council (PC)
-- Reforming the banking sector to make loans easier and more
affordable
-- Increasing the availability and reliability of electricity
and fuel
-- Instituting quality/safety/health standards for agricultural,
processed, and manufactured goods, especially imports
-- Development of tourism
-- Opportunities for training in modern business methods
-- Greater U.S. role in either capacity building or public works

Although rarely mentioned directly, the security situation was
never far beneath the surface. Several interlocutors privately
expressed to econoff their interest in promoting trade across
the Sunni-Shi'a sectarian divide. Discussion of future
development was limited to the near term, with participants
shying away from pondering longer-term (2-5 years) prospects.
End Summary.

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INEFFECTVE POLITICAL LEADERSHIP
--------------


3. (C) In late May, PRT Babil held a series of meetings with
provincial business and commercial contacts to discuss the
economic outlook for Babil province. Interlocutors focused on
current conditions and the near- to mid-term, avoiding looking
more than two years into the future. The Babil branches of the
Iraqi Chamber of Industry, Small Business Development Center
(SBDC),Iraqi Investment Center, Iraqi Economic Development
Center (IEDC),the Babil Chamber of Commerce, and the
Iraqi-American Chamber of Commerce all voiced criticism of the
Babil PC and castigated it for stifling business activity. In
the eyes of the Babil business community, the PC lacks
technocrats interested in fostering development. Specific
complaints included the failure to approve a provincial
investment commission (as provided for in the national
investment law) or to carry out reconstruction projects. A
member of the IEDC alleged the provincial government drove
wealthy Babil investors away to the neighboring provinces of
Karbala, Najaf and Diwaniya due to its inability to provide a
favorable investment climate.


4. (C) In exasperation, the head of the Babil chapter of the
Iraqi Industries Organization incredulously asked how the GOI
could fail when Iraq, with a population of 28 million, had a
budget of USD 41 billion. He contrasted this Iraqi per capita
ratio with what he purported were the figures for Egypt
(population: 75 million, budget: USD 22 billion),Syria (16
million, USD 9 billion),and Jordan (8 million, USD 7 billion).
So frustrated have Babil's business leaders become that they
ask, "What's the use?" and have all but given up lobbying the
government to shake off its lethargy.

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ONEROUS LENDING PRACTICES RESULT IN CASH CRUNCH
-------------- --


5. (SBU) The central government also came under criticism for
its failure to reform antiquated banking practices that result
in lack of access to capital and high interest rates. Banks
typically charge between 18 and 20 percent interest on loans and
insist on a quick start to repayment. (Note: The central bank's
interest rate on deposits is currently 20 percent as well. End
note.) Several contacts expressed trepidation at even
contemplating a loan for fear that a default will lead to
imprisonment (ref A). Another feature of these loans is the
requirement of a security guarantee equivalent to, if not
greater than, the amount of the loan itself. One contact noted
in a similar vein that businessmen seeking letters of credit
from Iraqi banks are required to pay transaction fees equal to
30-40 percent of the letter's value.

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A VICIOUS CYCLE OF ELECTRICITY AND ENERGY SHORTAGES

HILLAH 00000084 002.2 OF 003


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6. (C) Hand in hand with the need for money, businessmen
bewailed the scarcity of electricity and the sporadic and
unpredictable interruptions of current. The power shortage has
caused most factories in Babil to close their doors, they
maintained, and simply providing generators would not overcome
the energy crunch. The growing demand for private and
neighborhood generators has created a fuel shortfall and driven
up black market prices, in turn raising factory production
costs. Dr. Asmaa al-Hashimi of the SBDC asserted that
24-hour-a-day electricity from the national grid, even if sold
at market rates, would be cheaper than the exorbitant cost of
generators and fuel.

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INDUSTRIAL, AGRICULTURAL SECTORS STAGNANT
--------------


7. (SBU) In addition to insufficient electricity, a combination
of outmoded equipment and lack of government assistance
continues to plague Babil's industrial and agribusiness sectors,
according to contacts. The province's estimated 80 private
textile mills, many of them now shuttered for lack of
electricity and new machinery, are both a source of pride and a
symbol of the stagnation plaguing the province's manufacturing
sector. Industrial leaders described similar scenarios playing
out at cement and brick factories in the region. Likewise,
agriculture suffers from economic dislocation and agribusiness
remains underdeveloped. IEDC reported that production of sesame
fell from 20,000 tons in 2003-04 to an estimated 500-700 tons
last year, a decline they attributed to a lack of fertilizer and
the high cost of fuel. (Note: Moreover, most of Babil's
agricultural production is not processed or refined further to
enhance its value and thereby maximize the province's economic
gain. End note.)

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INFLUX OF CHINESE AND IRANIAN IMPORTS
--------------


8. (C) A lack of a quality control regime has contributed to a
flood of low-cost, low-quality goods in the Babil market.
Interlocutors report significant problems with certificates of
origin on products ostensibly made in the U.S. or Japan but in
reality originating in China. The lack of consumer protection
notwithstanding, the members of the Babil Chamber of Commerce
delighted in discussing with the PRT their forthcoming trip to
Guangzhou seeking further opportunities to import Chinese goods.
Iran, likewise, continues to make inroads into the Iraqi market
(ref B),particularly through its promotion of sister-cities
programs with southern Iraqi cities as well as close links to
provincial political leaders. Other contacts, while expressing
concern over the influx of Chinese and Iranian imports, argued
that the trend was not surprising given the increasing
difficulty in obtaining visas to travel to the West or even
Jordan or the Gulf Arab states.

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TOURISM DEVELOPMENT PLANS NEED A PUSH
--------------


9. (C) The existence of the Babylonian ruins in their backyard
never escapes the sights of local businessmen, several of whom
announced or reiterated to the PRT their plans to develop the
immediate environs as a major tourist attraction. They
invariably cite the lack of a suitable hotel as one constraint,
pointing out that the Regional Embassy Office (REO) occupies the
hotel nearest the ruins. Yet for all the enthusiastic talk,
Babylon-centered plans do not appear to have gone beyond the
development stage in the absence of a green light from the
provincial or national government. Moreover, secular or
non-fundamentalist business leaders allege that efforts to
promote tourism focused on antiquities run counter to the aims
of the ISCI-led provincial government and the reputedly
Sadrist-dominated Chamber of Commerce, which supposedly consider
religious tourism, based on the millions of Shi'a pilgrims
annually transiting Babil en route to Karbala and Najaf, the
only "legitimate" form thereof. (Note: PRT Babil is considering
ideas for helping support rehabilitation of the Babylon
archeological site. In addition, all five PRTs at REO Al-Hillah
are cooperating on fostering closer regional cooperation in the
creation of a tourist corridor that would offer enhanced
services and entice pilgrims to visit other attractions. End
note.)

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MORE PROGRAMS IN IRAQ, TRAVEL ABROAD NEEDED
--------------

HILLAH 00000084 003.2 OF 003




10. (C) Representatives from the Iraqi-American Chamber, IEDC
and SBDC emphasized the need to provide more training programs.
SBDC specifically cited its efforts starting with a fundamental
"How to Start a Business" course and plans for more specialized
training in micro-finance. All contacts expressed concern over
the limited opportunities for Iraqis to establish trading
contacts and exchange ideas abroad. They complained of the
increasing difficulty of obtaining the necessary visas to travel
on business -- including to the Middle East -- and several noted
that numerous participants to the recent "Rebuild Iraq"
conference in Amman were denied entry into Jordan.

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U.S. ROLE: CAPACITY BUILDING, OR PUBLIC WORKS?
-------------- -


11. (C) Babil business leaders overwhelmingly called for
continued -- if not greater -- U.S. engagement in the economic
realm and expected the U.S. to remain a major presence on the
ground in Iraq for the foreseeable future. Yet while all sought
U.S. help, the understanding of the possibilities and limits of
such assistance varied from group to group, with some
emphasizing capacity building (e.g., SBDC touting its training
programs via the USAID-sponsored Izdihar) while others sought
public works projects. Representatives of the Babil Chamber of
Commerce and the Chamber of Industry, for instance, made vague
or general requests for the U.S. to create something "for which
citizens of Babil will remember them," such as universities and
libraries modeled after ones in Cairo, Beirut and Amman.

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SECURITY
--------------


12. (C) While rarely mentioned during the recent meetings,
security remains just below the surface in any discussion of
development for Babil province and no doubt causes potential
major investors to think twice before pouring their money into
an uncertain environment. (Note: There have been some positive
developments, however, such as the opening of a yogurt factory
employing 200 people in North Babil and a date-processing plant
in Abu Gharaq - news of which no one in these meetings was
aware. End note.) All interlocutors agreed that instability
contributes significantly both to the high cost of domestic
products and to a breakdown of trade within Iraq, particularly
the non-Shi'a provinces. Indeed, not one Sunni from North Babil
attended any of the meetings. A member of the Iraqi-American
Chamber of Commerce even asked for the USG's assistance in
setting up a conference in Hillah featuring Sunni, Shi'a, and
Kurdish participants from throughout the country.

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COMMENT
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13. (C) Babil's economic situation, while not dire, is clearly
sluggish and in need of serious reform. The inability of the
GOI at both the national and provincial levels to foster a
favorable investment climate will continue to stifle Iraqi and
outside investors who otherwise might take risks to establish or
expand businesses, develop the province's agricultural and
tourist base, and increase citizens' purchasing power. At the
moment the high rate of return -- both monetary and political --
on Iranian and Chinese imports redounds to the detriment of U.S.
and local interests. Yet while Babil's business community
correctly identified lack of adequate access to capital and many
other institutional impediments to economic growth, they must
also think outside of the box if the province is to move beyond
its economic doldrums. Perhaps the most significant example of
the need for a different development paradigm is the continuing
emphasis on reviving the textile industry, the past success of
which was based on massive subsidies that effectively provided
free raw materials.


14. (C) Comment, continued: Under the circumstances, the most
significant steps that local business organizations can take
are: 1) pursue cooperative ties with other business
organizations throughout the region, 2) seek avenues for
engagement with all levels of the GOI in a common effort to
foster economic growth, and 3) expand training for small and
medium-size businesses of the type offered by the SBDC. PRT
Babil will continue to engage the business community in these
capacity-building efforts locally and regionally, one example of
the latter strategy being the prospective tourism corridor. End
comment.
HUNTER