ZOMBIE FIRMS HAUNT IRAQ'S ECONOMY

UNCLAS HILLAH 000038


E.O. 12958: N/A
TAGS: ECON EIND PGOV IZ
SUBJECT: ZOMBIE FIRMS HAUNT IRAQ'S ECONOMY

REF: 08 HILLAH 92, HILLAH 35



1. Summary: Many of Iraq's state-owned enterprises (SOEs) are
economic zombies -- the GOI won't let them die, and they do not
have the means to become viable on their own. At a chemical and
sack plant in Babil Province, for instance, less than half the
employees actually work, but the Ministry of Industry and
Minerals (MIM) still funds the entire bloated payroll.
Meanwhile, managers remain bound by MIM rules that increase
costs, pushing the operation even further from profitability.
While MIM is reportedly ready to finance new machinery,
investment alone is not enough, for its main customers are other
SOEs with uncertain futures. End summary.


Bird Watching at the Sack Factory
--------------


2. Jabbar Lool is the Director General of the Al Furatt Company
(www.furattco.com) in Sadat al Hindiya, a town on the Euphrates
about 50 miles south of Baghdad. Jabbar's company makes
industrial chemicals, corn starch, and woven plastic sacks for
fertilizer, grain and cement. About 600 of just over 2,000 Al
Furatt employees work at the sack factory -- that is, they are
paid to make sacks, but no more than 200 work on a typical day.
While the theoretical production is 10 million sacks a year, the
current output is just a fraction of that. On a tour of the
sack factory on April 26, only about 50 workers were visible on
the shop floor, where five of the seven production lines had
been idle for years. In some corners of the factory, birds
flitted between silent ranks of dilapidated machines.


3. Every sack Jabbar produces goes to the North Fertilizer
Company, another SOE. That happens by order of the MIM, not the
market. The sacks from Babil are 40-percent more expensive than
the ones MIM imports from Syria. Jabbar reckons that labor
accounts for about half of a sack's production cost. Based on
other data Jabbar gave the PRT, total average cost is well over
a dollar per sack. MIM pays Jabbar about 50 cents per sack.


A Faith-Based Business Plan
--------------


4. To be competitive, Jabbar must bring his costs down. That
requires a multi-million dollar investment in modern equipment.
Jabbar and his production managers think that with at least USD
12 million dollars for new machines, the factory can bring unit
cost down to 48 cents and achieve an average annual rate of
return just over 20 percent. MIM has reportedly promised
several million for new equipment, and the Task Force to Improve
Business Stability Operations is ready to chip in USD 1.5
million of equipment.


5. But that may not be enough to give the sack factory a future.
Even with financing in hand, Jabbar may not procure his own
equipment. That has to be arranged through MIM, a
time-consuming process, and time is money for SOEs just as for
any other business. And with factory workers technically
designated as civil service employees, their life-time
employment is guaranteed. These and other bureaucratic
restrictions leave Jabbar with practically no means of effecting
a turn-around.


6. MIM says subsidies for SOEs will end in 2011. The GOI's
determination to follow through on that policy is open to
question, but the prospect is nevertheless daunting for the Al
Furratt Company. Jabbar's projections of profitability after a
capital injection are based on the assumption that he can carry
on selling sacks to other SOEs. But if other SOEs lose their
subsidies too, Jabbar's business plan starts to look more like
wishful thinking.


Comment
--------------


7. Al Furatt, like other SOEs (reftels) is an economic zombie --
the GOI will not let it die but it does not have the means to
become viable on its own. Even with substantial injections of
capital, SOEs remain massively overburdened with excessive
employees making it difficult to project a glide-path to
privatization. Some SOE managers have told us they hope to
jettison up to two-thirds of their workers through golden
parachute retirements in the next two to four years. Still,
managers remain concerned that political exigencies may mean
that for every worker gone, one steps in to take their place.


HILLASK