INDUSTRY MINISTER ON FOREIGN INVESTMENT STRATEGY

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000152

SIPDIS

E.O. 12958: DECL: 01/19/2019
TAGS: ECON INV ENRG EIND IZ IR
SUBJECT: INDUSTRY MINISTER ON FOREIGN INVESTMENT STRATEGY
AND IRANIAN INTEREST IN IRAQI PETROCHEMICALS

REF: A. BAGHDAD 3906

B. BAGHDAD OI 1/16/2009

Classified By: Economic Minister Counselor Marc Wall. Reasons 1.4 (b,d
).

SUMMARY
--------------


1. (C) At a January 14 meeting, Minister of Industry and
Minerals (MIM) Fawzi Hariri provided Economic Minister
Counselor and Coordinator for Economic Transition in Iraq
Ambassador Marc Wall and Economic Counselor with an update
into MIM's ongoing initiatives to enter into
production-sharing joint venture (JV) agreements with foreign
investors for the rehabilitation and management of
state-owned factories. While he was upbeat on current rounds
of joint venture negotiation with investors, he said talks
over a 1 billion USD JV agreement between steel giant
ArcelorMittal and the State Company for Steel and Iron in
Basra were encountering some difficulties. Although Hariri
said Iranian firms are "aggressively" pursuing investment in
the state-owned Iraqi petrochemical sector, particularly the
State Company for Petrochemical Industries in Basra, he is
trying to steer these companies away from chemical-related
production lines. He did, however, convey MIM's willingness
to discuss a JV agreement with Dow Chemical for the Basra
facility. Hariri outlined MIM's next phase of its SOE
strategy, which he hopes will include a partial privatization
of a pharmaceutical plant. According to Hariri, the economic
crisis has helped attract more interest in investing in Iraq,
with Arab gulf states particularly demonstrating greater
appetite for Iraqi investment opportunities. End Summary.

EMERGING SUCCESS WITH JOINT VENTURE AGREEMENTS
-------------- -


2. (SBU) On January 14, Minister of Industry and Minerals
(MIM) Fawzi Hariri provided Economic Minister Counselor and
Coordinator for Economic Transition in Iraq Ambassador Marc
Wall with an update into MIM's ongoing initiatives to attract
foreign investors to enter into joint venture (JV)
production-sharing agreements with state-owned factories.
While citing some challenges in working with the foreign
investor consortia that took over management of the
state-owned cement plants in Kirkuk and Anbar provinces in
August 2008, he said all parties were "ironing them out."
(Note: MIM signed JV production-sharing agreements, the first
such deals, with both a Romanian and German investor
consortia in April 2008. MIM officials report production
increases of 20 percent at both plants, but lack of
electricity supply still hinder larger production increases.
End Note.)


3. (SBU) Hariri was upbeat on current rounds of joint venture
negotiation with foreign investors. He said a
recently-concluded JV deal with Japanese firm Marubeni and an
Iraqi partner for Beiji Fertilizer would increase production
from 500,000 tons/year to 1.5 million tons/year, and praised
the JV agreement between the Egyptian transformer
manufacturer Al-Suweti group and Diyala Electric (Reftel A
and Note: These deals only require formal signing of the
contract to go into effect. End note). He said MIM was also
"ready to move" on two JV deals with Kubaisa and Sinjar
cement plants, in Anbar and Ninewa provinces, respectively
(Reftel B and Note: The next day, Deputy Minister of Industry
and Minerals told econoffs that MIM had successfully
concluded talks for the plants. He said the consortium
involved with the Kubaisa plant include Japanese firms
Marubeni and Kawasaki, as well as American and Iraqi investor
QMarubeni and Kawasaki, as well as American and Iraqi investor
groups. The Sinjar deal is with a German-Kurd consortium.
The Council of Ministers must now approve both agreements,
after which, MIM and the consortia representatives formally
sign the contract. End Note.)

INDUSTRY MINISTER NOT UPBEAT ON TALKS WITH ARCELORMITTAL
-------------- --------------


4. (C) Hariri said negotiations for a 1 billion USD
production-sharing, JV agreement between steel giant
ArcelorMittal and the State Company for Steel and Iron in
Basra continue, but without noticeable progress. According
to Hariri, ArcelorMittal is now demanding "too many
commitments" from MIM. "They keep moving the goal post," he
said. For example, the company initially agreed to maintain
the labor force of 6,000 workers for the duration of the
agreement, but now preferred to gradually cut numbers, to
begin within a few years. He also stated the company had
first agreed to implement the investment over three years,

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but now preferred to draw it out over eight years. In
addition, he expressed dissatisfaction with ArcelorMittal's
terms that the GOI provide a guaranteed supply of gas to run
a 400 MW power plant the company intends to build. According
to Hariri, however, MIM does not have the authority to make
this commitment. He expressed his opinion that the company
is "playing for time" to see how the state of the global
economy evolves, but said talks will nevertheless continue.

IRANIAN INTEREST IN PETROCHEMICAL INDUSTRIES
--------------


5. (C) According to Hariri, Iranian firms are very interested
in investing in the state-owned Iraqi petrochemical sector,
particularly the State Company for Petrochemical Industries
in Basra. Describing the Iranian bidders as "very
aggressive," Hariri said he was "literally having to fend
them off." According to Hariri, there are 64 petrochemical
plants in Iran, 60 percent of which are state-owned, which
produce 25 million tons/year of product. Hariri said he is
trying to steer the Iranians away from chemical industrial
production lines and towards the state-owned tire company in
Najaf. He also discussed Iranian eagerness to do business in
the Iraqi market writ large, stating Iranian businesses see
Iraq as an extension of their domestic market. Hariri added
he is trying to convince Iranian companies to set up
production facilities here to help the labor market, rather
than to just sell goods.

BUT HARIRI PREFERS DOW CHEMICAL
--------------

6 (C) Hariri conveyed MIM's willingness to discuss a JV
agreement between Dow Chemical and the State Company for
Petrochemical Industries in Basra. Citing meetings between
MIM officials and Dow last year, Hariri said the ministry had
reached a "good understanding" with the company for the
possibility of such a JV agreement. He explained, however,
that Dow subsequently began pursuing a 12 billion USD
petrochemical deal in Kuwait, diverting the company's
attention from Iraq. Now that the Kuwait deal had fallen
through, Hariri said he wished to once again engage in talks
with Dow to let them know "we are still open to them." He
said Indian company Reliant was also exploring investment in
the Basra petrochemical line.

"PARTIAL PRIVATIZATION"
--------------


7. (C) While the production-sharing joint venture agreements
with the SOEs do not involve sale of equity of the enterprise
or ownership transfer of its assets, Hariri outlined MIM's
"phased" strategy that would work towards privatization of
certain SOEs. He said the JV agreements constitute the first
"phase" of MIM's SOE strategy, explaining that the ministry
was now conducting studies to enter the second "phase," which
would involve partial sales of equity shares in SOEs.
Stating, "We want to do one or two IPO's soon," Hariri
explained the State Company for Pharmaceuticals in Samara was
the leading candidate. He said MIM first needed to determine
a share price attractive to all sides, to include the value
of the land of the company. Operating within Company Law 21
of 1997 which governs mixed sector companies, Hariri
explained, the GOI would not retain ownership of more than 24
percent. He added that the JV program would continue, even
when such a partial privatization begins. In the future,
Hariri said, MIM plans to consider full privatization of its
QHariri said, MIM plans to consider full privatization of its
SOEs.

PRIMARY CHALLENGES FOR STATE-OWNED ENTERPRISES
-------------- -


8. (C) Hariri stated the two greatest challenges facing his
ministry were its vastly oversized labor force and power
generation challenges. He estimated MIM SOEs on average
employ 100 percent more workers than are required, and, in
some cases, 200 percent more than needed. Compounding the
problem, he said, many of these workers are completely idle,
given most factories only operate at one shift out of three.
He explained the difficulties of balancing investor concerns
of over-employment with the impact of job losses. Hariri
stated lack of electricity supply was creating drags on
production throughout MIM SOEs, complaining that he often
must divert gas supplies from his factories to the Ministry
of Electricity. On two occasions over the past four months,
Hariri said, an order from "the Iraqi leadership" to transfer
gas to the MoE forced him to entirely shut down one of his
two fertilizer factories. He recounted a conversation with
the MoE earlier in the day, when he was asked to divert

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additional gas to add 200 MW to the national grid.
"Electricity is a vote-winner," he said.

ECONOMIC CRISIS MEANS MORE INTEREST IN IRAQ
--------------


9. (SBU) According to Hariri, the economic crisis has helped
attract more interest in investing in Iraq. He specifically
said Gulf Cooperation Council (GCC) states are expressing
greater appetite for Iraqi investment opportunities due to
their weakened trust in global banking systems, estimating
that Qatar and Kuwaiti investment groups lost 25-30 billion
USD in the first week of the economic crisis. He said many
GCC states are now investing in economies such as Sudan,
indicating a new trend away from traditional markets. He
added that UAE and Kuwaiti firms in particular were already
investing heavily in the KRG.








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