THE TWO BIGGEST CONCERNS OF LOCAL BUSINESSMEN

UNCLAS SECTION 01 OF 02 BAGHDAD 002651 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ENRG EINV ETRD EFIN IZ SUBJECT: THE TWO BIGGEST CONCERNS OF LOCAL BUSINESSMEN REF: BAGDHDAD 2489 Sensitive But Unclassified. Please protect accordingly. ¶1. (U) This is a joint Baghdad ePRT 2 and Embassy reporting cable. SUMMARY -------------- ¶2. (SBU) During a luncheon with Embassy econoffs and Baghdad ePRT #2 members, businessmen from the Karada district of Baghdad said lack of affordable credit and reliable electricity were the two biggest impediments to business growth. A private banker defended lending practices, claiming interest rates were "market-based" and encouraging more deposit business with the private banks. A commercial real estate developer also expressed concern over housing regulations that prohibit him from selling deeds of individual residential units. End Summary. ¶3. (SBU) On August 12, Embassy Econoffs and Baghdad ePRT #2 members attended a luncheon with prominent businessmen from the Karada district of Baghdad (Comment: Karada was historically an upscale shopping and residential district and today is one of the most secure areas of the city. End note.) The meeting took place at the Economic and Development Progress Center (EDPC),a business development and training center established with Quick Reaction Funds requested by Baghdad ePRT #2. Iraqi businessmen included the owners of a flour mill, a commercial real estate development firm, an aluminum construction materials plant, a plastics factory, a retail food market, a food distribution company, and an air freight company. BUSINESSMEN RAIL AGAINST BANKS -------------- ¶4. (SBU) The businessmen cited poor access to affordable credit as a key impediment to business growth. The owner of a flour mill said the high cost of credit meant his company could not use bank loans to expand. He also said Ministry of Industry and Mineral loans of up to USD 50,000 USD for small to medium-sized businesses (reftel) were too small to be useful; such a loan would not even cover diesel fuel costs to support his generators for more than a few months. A shop owner in the Karada market, said he never had access to credit. In addition to high interest rates, he complained about the banks' requirements for loan guarantors. A commercial real estate developer said his company faced difficulty borrowing against assets. "How can I grow, if I can't mortgage my properties?" He put part of the blame on the lack of credit bureaus that would allow banks to rate the reliability of borrowers. As a result, he said, people are normally able to borrow only from people who know them well, so that access to credit is based almost exclusively on family connections. ...AND THE BANKER RESPONDS -------------- ¶5. (SBU) The president of a large private bank explained that interest rates depend on market conditions. "There is nothing for free," he said. He said his bank offers short-term loans of one year, and long-term loans of up to three years. But most entrepreneurs in Iraq do not understand what banks can do, how they manage risks, or how to do business with them, he said. The banker stated potential borrowers should first set up deposit accounts with the banks. By establishing such a relationship first, he explained, bankers will have greater knowledge of borrowers' ability to pay back loans. The businessmen, however, expressed reluctance to deposit money at private banks because they lack the full faith and credit of the government. "We will only put our money with the state banks, where it is safe," said the Karada market shop owner. ELECTRICITY NEEDS -------------- ¶6. (SBU) All businessmen in attendance said the lack of reliable electricity and the high cost of diesel fuel to power their own generators significantly affect their businesses. The owner of Al-Haibd Distribution Company stated his company was forced to purchase diesel fuel from the black market for both cold storage and his fleet of trucks. Having to pay black market prices, he explained, was therefore driving up the price of food. Due to such challenges with cold storage, his company does not import any BAGHDAD 00002651 002 OF 002 products requiring refrigeration. In addition, he complained that the Ministry of Electricity arbitrarily estimates an increase in electricity usage when billing his business each month. Security problems had kept the Ministry from sending people out to read meters. The Karada market shop owner said electricity was an even greater problem than lack of credit, stating, "Relatives can give me money, but they can't give me electricity." He estimated 75 percent of his profit margin goes to covering his electricity costs, and complained his electricity often fails during peak business hours. Both he and the flour mill owner said monthly diesel fuel costs to run a generator average 1.5 million IQD (1,285 USD). REAL ESTATE CONCERNS ALSO SURFACE -------------- ¶7. (SBU) While highlighting Iraq's high demand for housing, the commercial real estate developer said antiquated housing regulations are deterring him from building apartments to meet this demand. He specifically criticized a law that prevents private developers from selling title to individual apartment units. Under this regulation, he said, home buyers can purchase an equity share in the building, but not purchase a unit - with deed - individually. He stated this discouraged him from building private residential units, explaining, "I do not want to be a landlord. I want to build, sell, and take my profit." He and other developers reportedly met recently with Deputy Prime Minister Barham Salih to raise this issue, but there had been no progress on it. The developer also said Baghdad has a significant deficit of hotel rooms, with only 2,000 available in the city. He said he wanted to build a hotel, but complained about a municipal regulation that prohibits the construction of hotels over eight stories. "Let's get this changed, and I will build a huge hotel," he said. COMMENT -------------- ¶8. (SBU) Despite the many challenges they face, all of these businessmen said they are making money in the Iraqi economy. All were also reluctant to become engaged politically to bring about the changes they claimed were necessary. Security was a theme that came up less frequently than expected. Several acknowledged that the security situation, while fragile, was no longer the most challenging obstacle to do business. EPRT #2 will continue working with these and other business owners through the EDPC to build a business association that could mobilize support for regulatory and legal changes to stimulate further business growth. End Comment. CROCKER