PRT DIWANIYAH: CHALLENGES TO INVESTMENT IN

UNCLAS SECTION 01 OF 02 BAGHDAD 000165 SBU SIPDIS E.O. 12958: N/A TAGS: PGOV ECON EINV EFIN SUBJECT: PRT DIWANIYAH: CHALLENGES TO INVESTMENT IN DIWANIYAH PROVINCE (CORRECTED) REF: BAGHDAD 32 ¶1. (SBU) SUMMARY: Big dreams and bigger obstacles define the investment climate in Diwaniyah Province. Provincial authorities are aiming high, but the province,s business leaders dismiss recent announcements of large investment deals in housing, hospitals, and construction as media events. Business leaders tell the PRT that national laws are part of the problem and that the provincial government is unaware of their needs and unresponsive to their efforts to cooperate. For its part, the provincial government seems ill-equipped to tackle the challenge of stimulating investment in this predominately agricultural province. Nonetheless, the province enjoys some comparative advantages that, highlighted through better marketing, could draw in more investments in various sectors. END SUMMARY ¶2. (U) In recent days, the PRT has forged a positive relationship with the Diwaniyah chapter of the Iraqi Businessmen,s Union (IBU). The IBU brings together most of the province,s top business leaders. This forum allowed the PRT to build on the discussions with Governor Salim Alwan, Provincial Council (PC) members, and smaller business owners about the province,s business climate. FEW PROJECTS MATERIALIZE - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶3. (SBU) Provincial authorities have signed numerous Memorandums of Understanding (MOUs) with foreign investors for the development of projects ranging from housing to hospitals to a recycling plant. Details on these projects are sketchy, however, and there is no evidence that they are materializing. The PRT knows of only one project, an Omani firm,s plans to develop a commercial center in Diwaniyah City, which appears to be coming to fruition. The PRT has unverified information about several housing projects that reportedly are underway. The failure of other MOUs to result in real projects so far has evoked some discontent among the population (reftel),and our IBU contacts scornfully dismissed the MOU announcements as nothing more than media events. NATIONAL HURDLES ABOUND - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶4. (SBU) Both Governor Salim and the PRT's IBU interlocutors voiced frustration that national legislation complicated the investment process, particularly by creating hurdles to land transfers to investors. Business leaders also took aim at national government policies and practices. Several of the business leaders characterized Iraq as proceeding down a path towards socialism. They argued that the national government is focused on keeping foreign development funds looped within the government instead of pushing funds out to the private sector. The business leaders characterized the continued support of the food distribution system, state-owned enterprises, and government procurement practices as evidence of the trend towards socialism. They posited that the government is on the wrong track investing in these areas without utilizing the private sector, and criticized the government,s practice of importing heavy equipment without going through the Iraqi private sector. (Note: At least one of our IBU interlocutors is an importer of heavy construction equipment. End note.) ¶5. (SBU) Business leaders and government officials alike assailed high interest rates as a key impediment to investment. While loans are available through small banks in the province, they said, the interest rates of 9 to 12% are too high to stimulate the use of loans for business investment. The business leaders suggested a rate of 2 to 3% as being more affordable for local businesses and as more Qas being more affordable for local businesses and as more likely to increase the use of loans for business development. Local banking officials, however, have told us their commercial interest rates of 10% equate to approximately 6-7% in the United States due to the different method of calculating interest over the life of the loan. According to the bankers, a significant share of the monthly payment is applied to the principle throughout the life of the loan, thereby reducing the total interest over the loan period. ¶6. (SBU) Issues of specific interest rates aside, the IBU leaders identified access to banking and financial institutions as another key impediment. They noted that the planned opening of a branch of the National Commerce Bank in Diwaniyah had never materialized, and said that no other sizable financial institutions exist in the province to provide lending services to businesses. The business leaders requested PRT assistance to identify and support the opening of an American financial institution in Diwaniyah to demonstrate confidence in the province,s security and stability to outside investors. They also criticized the GOI,s permission for the opening of an Iranian bank with an office in neighboring Najaf without requiring a Diwaniyah branch as well. ¶7. (SBU) Among national impediments to investment, the BAGHDAD 00000165 002 OF 002 business leaders also pointed to the lack of stable economic growth as resulting in a lack of specialization and training within the private sector. Many businessmen switch from one business to another or operate multiple businesses in an attempt to find whatever is profitable at the moment. Citing themselves as examples, the IBU leaders said that it is normal for a businessman in the province to operate a construction company, an import business, a market, and an agricultural venture at the same time, or to jump around from one field to another. The business leaders posited that this trend results because of the government,s lack of planning and analysis of market trends. They voiced concern that it is leading to failure to develop specialists in particular fields, and to lack of exposure to western business practices. The economic isolation of the Saddam era has left them behind in terms of modern practices, our IBU interlocutors concluded, adding that their organization is encouraging business leaders to attend more conferences abroad, visit western countries, meet business leaders outside Iraq, and find western businesses to work with. (AND PROVINCIAL-LEVEL HURDLES RANKLE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶8. (SBU) Despite their many complaints about nationally-based hurdles, issues with the provincial and local governments dominated the businessmen,s list of provincially-based impediments to economic development, and these seemed to rankle our interlocutors more. Above all, they argued that, IBU efforts notwithstanding, the members of the PC do not understand the needs of the private sector. The business leaders pointed to few, if any, PC efforts to attract business and encourage private sector development in Diwaniyah, and argued that the PC and Governor had taken a &haphazard approach to bQiness,8 especially by failing to plan for the future. ¶9. (SBU) For his part, the Governor has shown increasing frustration that efforts to attract investment have not come to fruition. He recently complained to PRTOffs about the shortcomings of Diwaniyah,s Provincial Investment Commission, suggesting that it was poorly run and was not reaching out to investors, including foreign ones, as actively as it should. He indicated that he is considering pushing to change the PIC,s membership to include more business owners, in hopes that this might make the organization more assertive in pushing for investments in Diwaniyah. He also expressed regret that no Diwaniyah business leaders had been invited to the recent Washington Investment Conference, a view shared by the IBU leaders. ¶10. (SBU) For its part, the PRT has sometimes found provincial authorities to be difficult partners. Our multiple attempts to follow up with both the Governor and the PIC on the Washington Investment Conference, for instance, have resulted only in vague promises that they will provide the PRT with results of the province,s efforts to nurture contacts made there. Conversations with the PC,s Industry Committee Chair brought nothing more than appeals for massive amounts of funding for the province,s struggling SOEs. COMMENT - - - - - - - - - ¶11. (SBU) Despite its many shortcomings, Diwaniyah Province has some comparative advantages, including a good security situation and central location in southern Iraq. Provincial authorities have highlighted these, but could do a far better job of marketing the province. Beyond that, we see little evidence that either the provincial authorities or the business community are pressing Baghdad to address Qbusiness community are pressing Baghdad to address national-level problems. The PRT will continue to work with all these entities to address both the national and provincial hurdles that have them hamstrung and somewhat discouraged. HILL