REPORT ON HORMATS-MAHDI MEETING IN WASHINGTON -

UNCLAS STATE 005831 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EPET PREL PGOV EINV ECIN EAID EBEXP BTIO IZ QA, SA, BA SUBJECT: REPORT ON HORMATS-MAHDI MEETING IN WASHINGTON - 13 JAN 2010 REF: BAGHDAD 00036 ¶1. (SBU) Summary: On January 13, 2010 Under Secretary for Economic, Energy and Agricultural Affairs, Robert Hormats and Iraqi Vice President Adel Abd' Al-Mahdi addressed several major economic challenges faced by Iraq. Al-Mahdi said that he is ready to see the debt issues with Gulf Arab neighbors settled, and hopes this can be achieved without having to delve into broader political issues. He expects the 2010 Budget to be adopted "very soon ... within days." He agreed that Iraq's poor ranking on the World Bank's "Ease of Doing Business Scale" reflects needs to reform and update Iraq business and investment laws, regulations and practices. While not fully informed about the issue of Iraq demands to amend already initialed oil development contracts, Mahdi acknowledged how such actions would erode investor confidence (oil and non-oil),but feels that greater involvement of U.S. oil companies in Iraqi oil development is needed and would send a good message. He identified building mutual confidence, also, as the key to resolving the differences between the central government in Baghdad and the Kurdish Regional Government (KRG) over the Hydrocarbons Law. Taking a long-term view, Mahdi especially wants to involve Iraq's citizenry broadly in the economic development process through exemplary "pilot projects" (public or private) and expanded efforts for training and education. Responding to a suggestion that Iraq might be a good place to establish new Qualified Industrial Zones (QIZs),U/S Hormats explained that the whole topic of QIZs has become politically contentious in the U.S., reflecting desires to see greater job creation at home, and concerns over foreign labor and environmental practices. End Summary. ¶2. (SBU) During their hour long meeting, U/S Hormats and Iraqi VP Adel Abd' Al-Mahdi discussed several of the major economic challenges facing Iraq. Without prompting from U/S Hormats, VP Al-Mahdi raised the issue of debt reduction noting that it continues to weigh on Iraq, and referring to the fact that the debts of the prior regime to Iraq's Gulf Arab neighbors are still unresolved. Al-Mahdi said Iraq seeks good relations with all its neighbors and should be viewed as a "bridge" between the Arab nations to its south and west, and the Turks and Iranians to the north and east. It would be wrong, he said, to see Iraq as being on the Arab "front line" against Iran. While giving no specifics, he said he is consulting with Qatar and Bahrain. He also mentioned a letter he recently sent appealing to the Saudi King for an end to harmful rhetoric and the establishment of good neighborly relations. Economic Reform -------------- ¶3. (SBU) Recalling that Iraq had once been the bread basket of the Middle East, but now is a net food importer, U/S Hormats encouraged the GOI to undertake necessary economic and regulatory reforms. He pointed to the World Bank's ranking of Iraq at 152 of the 181 countries on its "Ease of Doing Business" scale. He said all sectors of the economy would benefit from reform, and job creation would accelerate if the GOI makes concerted and persistent efforts to improve its investment climate through such measures as establishing a one-stop-shop for foreign and domestic investors, and by joining the international arbitration conventions. ¶4. (SBU) Hormats also noted that concluding the Stand-by Arrangement with the IMF depends on the passage of the 2010 Budget, and that this needs to happen soon - at least one month before the national elections on March 7. Al-Mahdi responded that, "the budget will be passed by the Council of Representatives in the next few days." He had "good discussions" with the World Bank (WB) earlier in the day, but noted that of the $500 million in International Development Assistance (IDA) that the WB granted Iraq in 2004, only about $200 million has actually been disbursed. He admitted that Iraq's legal and regulatory framework has impeded disbursements, and said he has been working to address these issues since 2004-05, when he was Minister of Finance. He said that improving conditions for investment should be a "top priority" for the new government. Investment -------------- ¶5. (SBU) VP Al-Mahdi said he would look into the details related to recent oil development contract revisions, adding that greater participation by American oil companies in Iraq's oil development would send a confidence building message. He said Iraq wants to have petroleum development relationships with all parts of the world, including the United States -- not just China, Russia and a few others. He wondered why ExxonMobil was the only American company to make a bid. ¶6. (SBU) Hormats explained that many factors enter into the investment decision calculations that oil companies make. Each has its own global market outlook, technical requirements, and business needs. Given another opportunity, some might reconsider and participate. Both for oil and non-oil investment, the best things Iraq can do are pass the Hydrocarbons Law, avoid actions that confuse or discourage investors, and make the reforms needed to improve the overall investment climate. ¶7. (SBU) On the Hydrocarbons Law, Hormats urged reconciling the differences between the central government in Baghdad and the KRG. Al-Mahdi responded that the differences surrounding the Law boil down to "just a few words." The main issue, he said, was confidence, and that building Baghdad-KRG confidence should be a top priority after the elections. ¶8. (SBU) Al-Mahdi said that business investor confidence would also be improved by resolving the "American claims," referring to the lawsuits of the American victims of the prior regime. Al-Mahdi sees great benefits coming from well-executed "pilot projects," that when shown to be successful could be readily duplicated around Iraq. "Make one good bank and others will follow; similarly for a supermarket, or a hotel, or an airport," he said. Education -------------- ¶9. (SBU) Al-Mahdi noted that while Iraqis are good workers, having lived in isolation for decades, they need education and training to catch-up and connect with the rest of the world. His advisor, Zuhair Homaidi, went on to explain Iraq's new program for providing up to 10,000 scholarships for Iraqis to study in universities in America and the United Kingdom. Six to seven hundred students will participate in the program during 2010, seeking bachelors, masters and doctoral degrees; the numbers will increase at an accelerating pace in future years. Now, the students can choose their fields, but in the future studies in such areas as engineering, the sciences, public administration and education will be encouraged. U/S Hormats wholeheartedly endorsed this emphasis on education, recalling how a similar program helped to transform China in the 1970s and 1980s. Qualified Industrial Zones -------------- ¶10. (SBU) Responding to Advisor Fareed Yasseen's inquiry as to whether the U.S. would consider adopting the Qualified Industrial Zone (QIZ) concept in Iraq, U/S Hormats explained that QIZs were first established to tap Israeli investment to employ Palestinian manpower, and then extended to Jordan and Egypt and adapted in a different form to Afghanistan (the latter without the Israeli investment component). However, in today's environment, where creating new jobs for Americans in the United States is a top priority, extending the QIZ concept has many opponents in Congress. The American labor and environmental lobbies are particularly critical. ¶11. (U) List of Participants: USG --- U/S Robert Hormats NEA/I DAS Michael Corbin E Staff Sara Yun NEA/I-EAA Kevin Taecker GOI --- VP Abd' Al-Mahdi Amb Samir Sumaidaie Advisor Muhammed Al-Hakim Advisor Zuhair Homaidi Advisor Fareed Yasseen ISCI-DC Rep Karim Almusawi CLINTON