"SHOW ME THE POWER," SAYS EAST BAGHDAD BUSINESSMAN

UNCLAS BAGHDAD 000522 E.O. 12958: N/A TAGS: PREL ASEC IZ SUBJECT: "SHOW ME THE POWER," SAYS EAST BAGHDAD BUSINESSMAN ¶1. This is a Baghdad EPRT-2 reporting cable. ¶2. SUMMARY: Electricity is now the biggest problem for manufacturers in eastern Baghdad. In the continuing absence of reliable power from the national grid, many manufacturers must generate their own power but cannot buy an adequate supply of fuel at the official (subsidized) price. One big company owner thinks he could add fifty jobs to his payroll if the company could get more fuel or reliable power at a lower price. Under the present system, in which the GOI sets an official fuel price too low to align supply and demand, companies must turn to unofficial suppliers who often sell adulterated fuel. The GOI's failure to complete liberalization of the fuel market inhibits growth and promotes corruption. END SUMMARY. MANUFACTURING IN A BAD NEIGHBORHOOD ¶3. The Aladeen Water Heater Company (AWHC) factory is situated in the Kamaliyah Industrial Park in eastern Baghdad's 9 Nissan district, which borders Sadr City. According to local wisdom, "everything that goes into and comes out of Sadr City goes through 9 Nissan." Historically, and even recently, 9 Nissan has been a launching point for rockets aimed at the International Zone and other parts of Baghdad. The residents of 9 Nissan are typically lower-middle class, and socio-economic status declines the farther east and north one goes in the district, which terminates in the outlying Shawra Wa Um Jidr area. ¶4. The situation in the Kamaliyah Industrial Park is bleak after years of absent security and terribly insufficient electricity, both of which are crucial for the operation of factories. Currently 90 percent of the factories in the Kamaliyah Industrial Park are closed. Industrialists evacuated Kamaliyah largely because of the bad security situation and the lack of financing. Most of the remaining businesses and factories are small in scale, with the exception of AWHC. While Kamaliyah has the distinct rustbelt atmosphere of defunct factories, AWHC hums with the tune of business as usual. During several recent EPRT visits, employees were busy working, machines roared, and the place was clean. FACTORIES NEED LOWER FUEL COSTS TO EXPAND ¶5. AWHC's owner and manager, who goes by the name Abu Ahmed, explained during a recent visit that his company now employs 125 "laborers" and 17 "employees" full-time. This makes AWHC the largest private employer in 9 Nissan by a large margin. At full capacity in decades past, Aladeen employed 430 full time workers in two shifts. Laborers now earn $250 per month. He is the sole owner; the GOI has no stake in the business. Due to improvements in security, Abu Ahmed said, "ten people per day walk in and ask for a job." His factory produces approximately 2,800 hot water heaters per week, which he sells throughout Iraq through a network of private distributors. ¶6. Abu Ahmed said he spends at least $10,000 per month on diesel fuel for the generator that powers his factory. When asked what he needed in order to expand his business and hire more workers, Abu Ahmed replied, "I desperately need reasonably-priced fuel." Like every other business owner in Baghdad, Abu Ahmed is unable to get his full allocation of government-priced fuel and is therefore forced to buy from the black market. He said that if he could access reasonably priced fuel, he could immediately increase his employment by 50. GOI NEGLECTS 9 NISSAN ¶7. Historically, the GOI has neglected to provide the Baghdad district of 9 Nissan with good essential services, and in recent years the situation has only grown worse. Currently the Kamaliyah Industrial Park gets electricity from the national grid for only two QIndustrial Park gets electricity from the national grid for only two or three hours during business hours (0730 - 1530). The main street of the Kamaliyah Industrial Park is in such poor condition it is nearly impassable. In all, Abu Ahmed said, "the GOI does not support industrial sites." ¶8. Asked if any politicians or political parties advocate on behalf of private industry, Abu Ahmed replied, "The GOI is useless. The politicians speak nice words but don't act on them. Politicians acknowledge the 'import problem', but haven't helped the situation. We are able to compete in this business because of our good product and reputation, even though our product is a little bit more expensive." He noted the GOI had issued a tender to supply 100,000 solar heaters through the Ministry of Trade - but the GOI was going to give the business to the Chinese. ¶9. Abu Ahmed said if the U.S. really wanted to help, the best way would be to help him get his "rightfully allocated Ministry of Oil subsidized fuel." He opened a folder and pulled out a paper from the Ministry of Oil that authorized him to purchase 18,333 liters of fuel per month at the official price. In all, Aladeen factory consumes 32,000 liters per month. "You know how many liters I was able to purchase last month?" Abu Ahmed asked. "Two thousand. The other 16,333 are stolen." As a consequence, he had to purchase the remaining needed fuel at the black market price. "It is terrible quality fuel that damages my generators." COMMENT ¶10. The travails of AWHC and Abu Ahmed starkly illustrate how the GOI's failure to remove subsidies for energy - whether fuel for cars and generators or electricity for homes and factories - distorts the efficient operation of a free market and impedes economic development in Baghdad and beyond. While the GOI eliminated direct subsidies for nearly all fuels at the urging of the International Monetary Fund, it has not followed through with full liberalization of the fuel market. Similarly, Iraq has no price mechanism to bring the demand for electricity in line with the supply. As long as the GOI avoids tackling these problems, they will continue to inhibit productivity gains and any hopes for job growth in the Baghdad rustbelt. BUTENIS