US embassy cable - 05BAGHDAD2839

UNCLAS SECTION 01 OF 04 BAGHDAD 002839 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, IZ, ECON Development, Reconstruction 
SUBJECT: PROMOTING PRIVATE SECTOR DEVELOPMENT (PART 1) 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET 
DISTRIBUTION. 
 
1. (SBU) SUMMARY:  Development of the private sector 
through mobilization of domestic and foreign investment is 
crucial to Iraq's economic recovery and reconstruction, 
long-term growth, and generation of sustainable jobs. 
Economic growth and creation of jobs is also essential for 
political stability. However, business in Iraq, at present, 
is struggling with social, institutional, and 
legal/regulatory constraints reminiscent of conditions 
existing after the fall of the Soviet Union. The USG is 
implementing a broad program of assistance designed to help 
Iraq make the transition from a statist to a market-based 
economy. We expect this effort to pick up momentum under 
the ITG, with appointment of Barham Saleh as Minister of 
Planning and Development Cooperation (MOPDC). Saleh has 
indicated that development of the private sector and 
promotion of investment are a primary mission for his 
Ministry. He is highlighting private sector development as 
an integral element of Iraq's national development strategy 
to be presented to the international donor community July 
18-19 in Jordan, and he has requested USG assistance to 
spur this agenda during his tenure. 
 
2. (U) USG policy initiatives in Iraq, bolstered by 
technical assistance, support fundamental economic reform 
that will provide the legal and institutional 
infrastructure needed for long term, private sector growth 
and job creation, as well as shorter-term efforts to spur 
private sector economic activity.   The overall economic 
development program covers three main areas:  commercial 
law/regulation, policy, and institutional reform; 
strengthening the private sector; and human capacity 
building. Given the broad scope of the USG's private sector 
development effort, this cable focuses first on 
microeconomic assistance programs designed to assist Iraqi 
businesses and individuals.  A subsequent cable will 
outline USG programs underway that are targeted at broader 
reform, at the macroeconomic level, to create the 
environment necessary for these firms and individuals to 
flourish. Baghdad 1194 provided our message to the ITG on 
reform and privatization of state-owned enterprises.  A 
strong and sustained effort to support rapid development of 
the private sector is key to Iraq's economic development 
and stability. END SUMMARY 
 
3. (U) Microeconomic assistance programs are under the 
responsibility of USAID and IRMO and are coordinated 
through an inter-agency Private Sector Working Group in 
Baghdad.  These programs include: financial sector reform, 
business and investment facilitation, and agricultural 
development. 
 
----------------------- 
Financial Sector Reform 
----------------------- 
 
4. (U) ACCESS TO CREDIT - Most Iraqi businesses lack access 
to capital.  Bank lending in Iraq consists entirely of 
general-purpose loans, collateralized with commercial 
property.  Collateralization requirements of over 150% are 
common thus shutting out many businesses and entrepreneurs. 
Although many banks have adequate liquidity to increase 
lending, outdated banking practices and, subsequently, high 
collateralization requirements are starving small and 
medium sized enterprises (SMEs) of desperately needed 
capital. This contributes to poverty, low household income 
and social unrest. In order to address this need, financial 
sector reforms must aim at ensuring that investment capital 
is available for the smallest Iraqi entrepreneurs and 
businesses. 
 
5. (U) USG efforts are providing micro-entrepreneurs, 
particularly women and the very poor, with greater and more 
reliable access to financial and non-financial services 
needed to improve enterprise performance and household 
income. To support this objective, a $36 million program 
has approved 12,000 micro-finance loans ranging between 
$500 and $25,000, with an average of $2,000 per loan. Total 
disbursements for these loans are over $23 million to date. 
The loan program aims to have 10 percent women from the 
total number of borrowers, and so far, women have 
represented 9 percent. A new $25 million micro-finance 
initiative seeks to expand that figure to 50 percent women 
borrowers while ensuring competition, wide geographic 
coverage, and training. Besides micro financing to the 
smallest Iraqi entrepreneurs, financial reforms are also 
underway for small size businesses, which suffer from 
similar capital shortages. For instance, training and 
installation of loan systems in Iraq's six strongest 
private banks are underway by USAID, which will make 
increased loans available in the $25,000 to $500,000 range. 
 
6. (U) For medium-sized businesses, the USG is currently 
working to link private bank loan capacity with a $7 
million loan program, which will make a total of $21 
million available for medium-sized businesses.  USAID is 
also exploring the possibility of creating bank portfolio 
guarantees, which would ease the risk of lending to some 
businesses that otherwise might be excluded from the 
program.  In, addition, a middle-market lending and 
business program was established by IRMO in August 2004. 
The project targets medium-sized businesses based on 
current and future cash flows and is designed to extend 
business loans in the range of $500,000 to $5 million.  The 
program structures all loans to have a term ranging from 2 
to 5 years - which is common in industrialized nations - 
rather one year, which is the traditional lending term in 
Iraq. To date, the middle-market lending & business program 
has created a $136 million middle-market credit facility 
through the establishment and funding of a private 
foundation. 
 
7. (U) BANK RESTRUCTURING - Iraq's banking sector is in a 
shambles.  The two state-owned banks have been isolated 
from international markets, their policies have been 
centrally directed for nearly 30 years, and they have 
focused mostly on financing government debt.  Iraq's state- 
owned enterprises account for approximately 90 percent of 
financial lending in Iraq, but most SOE's are laden with 
non-performing assets. State-owned banks have very little 
capacity to engage in large scale lending operations to the 
private sector. Restructuring the banking sector would 
greatly improve the financial sector and overall economic 
efficiency. 
 
8. (U) USG efforts have focused on bank reform by providing 
options and recommendations to Finance Minister al-Allawi. 
A Bank Restructuring Working Group, comprised of 
representatives of Treasury, USAID, ECON, and IRMO, has 
taken the lead in recommending restructuring options to the 
Finance Ministry. Bank restructuring and the associated 
costs would be assumed by the GOI with limited technical 
assistance from the USG. An initiative to move forward with 
the five approved international bank acquisitions of Iraq's 
private banks has been undertaken, along with direct 
support to expedite the acquisitions along with the six 
stand-alone requests that have been approved by the Iraqi 
Central Bank. A variety of complicated issues have stalled 
this much-needed injection of capital into the private 
banking system.  We will work to facilitate these 
transactions through a collaborative process with the 
appropriate Iraqi Ministries and Commissions. The near-term 
modernization of this segment of the banking industry is 
dependent upon these transactions being completed. 
 
9. (U) CAPITAL MARKET DEVELOPMENT - Efficient capital 
markets are important for distributing investment capital 
to where it is needed while offering more citizens the 
opportunity to participate in Iraq's economic growth. 
Furthermore, a functioning and transparent stock market is 
key to reforms involving state-owned enterprises by 
creating a market for privatized companies.  To that end, 
the Iraqi Stock Exchange reopened in June 2004, and the USG 
is continuing to help re-tool the stock market and train 
Iraqis to meet the basic needs of the market.  An important 
part of the program being carried out by IRMO is the 
installation of an electronic trading, settlement, and 
clearing system over the next nine months, with direct 
information feeds to the Iraq Securities Commission (ISC) 
to enhance oversight. 
 
10. (U) Another factor in developing capital markets is 
establishing and supporting an effective, independent ISC, 
which includes the development of an independent 
depository. Iraq's Securities Commission has been 
identified as the lead regulator over the stock exchange 
and the USG has provided initial training to the commission 
on the foundations of oversight, governance, and management 
structure.  Additional program support includes support for 
senior management, standardizing accounting disclosure 
releases, and providing computer training to stock exchange 
staff. 
 
------------------------------------ 
BUSINESS AND INVESTMENT FACILITATION 
------------------------------------ 
 
11. (U) While Iraq has a long tradition of trade and 
mercantilism, many Iraqi businesses and individuals lack an 
understanding of modern business principals stemming from 
30 years of isolation and socialist education.  The USG has 
established programs designed to support the development of 
business skills and opportunities in Iraq. 
 
12. (U) BUSINESS SKILLS DEVELOPMENT - The Private Sector 
Development in Iraq (PSDI) project, under USAID's 
direction, is a business skills development activity 
intended to promote the expansion of a private, 
competitive, and efficient private sector in Iraq. Iraqi 
professionals, trained by American volunteers, are 
providing training and consulting services for businesses 
in 10-20 high-priority industry groups.  Support is 
provided through basic tool kits that cover such things as 
business planning, financial statement preparation, 
marketing and sales, and proposal writing.  In addition, 
PSDI has developed and is distributing business tool kits 
that can serve as self-training devices for micro- and 
small- entrepreneurs.  In early 2005, the program began 
implementing its $3 million grant component to support 
Iraqi enterprises.  The USG has worked closely with 
military units to identify and develop programs to assist 
private enterprises.  Other activities include training 
accountants in international accounting standards, 
assisting Iraqi universities to offerings more business 
classes, and retooling vocational training efforts to more 
closely match the needs of the Iraqi ministries. 
 
13. (U) VOCATIONAL EDUCATION - The Ministry of Labor and 
Social Affairs is receiving USG assistance to rehabilitate 
and implement new curriculum in some of the Ministry's 
Vocational and Technical Training Centers (VTTCs). Working 
through USAID, this program is working with seven VTTCs in 
Baghdad to assist with upgrading the vocational training 
curricula in Iraqi ministries responsible for 
infrastructure and essential services.  The main purpose of 
this assistance is to enhance employment opportunities of 
Iraqis by matching skill requirements needed for the 
reconstruction effort with Iraq's trained through the 
VTTC's. 
 
14. (U) BUSINESS CENTERS - The major goal of pilot business 
centers is to introduce the use of standard, international 
business practices, and to promote ultimate Iraqi control 
and management of these centers for the benefit of Iraqi 
businesses.  So far, pilot business centers have been 
established in Mosul, Kirkuk, and Baghdad, through a $4 
million USG project, administered by IRMO. These centers 
disseminate information on employment/business 
opportunities and provide a wide variety of applicable 
services to Iraqi businesses across the country.  For 
instance, the centers are helping Iraqis to use the 
Internet to widen their accessibility to information. The 
centers are providing extensive hands-on training designed 
to improve professional and business management skills 
including a speakers program on relevant and timely 
business topics.  Other programs include creating e- 
commerce portals for bidding on local and government 
contracts, and identifying and implementing training 
programs tailored to specific regional and technical needs. 
Based on international "best practices", the business 
center program is encouraging business centers and other 
business associations across Iraq to form a National 
Business Alliance to voice private sector needs/concerns to 
government policymakers. 
 
15. (U) INVESTMENT PROMOTION - Foreign and domestic 
investment is recognized as an important factor to Iraq's 
economic development.  Internationally, investment 
promotion has evolved into a highly developed business, 
which requires appropriate national institutions and 
structures, a supportive business environment and 
professional people, with skills and knowledge to attract 
investment within a highly competitive international 
market. In order to formalize investment promotion within 
the Iraqi government, USG has supported the establishment 
of in Investment Promotion Agency (IPA) by the Iraqi 
government and dedicated to the promotion and attraction of 
foreign and domestic investment. Some of activities which 
IPA's typically support include: promoting investment 
incentives, devising investment strategies and promoting 
regional investment promotion events, working with 
government agencies to promote investment and business 
approval processes, and training businessmen in successful 
negotiation techniques 
 
16. (U) The USG is currently assisting the government of 
Iraq to establish an IPA, which will specialize in 
marketing Iraq to potential to foreign and domestic 
investors, and in providing services to new and existing 
businesses and industries.  Under the assistance of USAID, 
the IPA is designed to assist in the creation of a broader 
regulatory environment that will facilitate investment. 
USAID is also assisting in the development of an 
appropriate management structure, policies, and procedures 
for Iraq's IPA.  The IPA, under a Board of Directors, would 
be a public-private sector partnership designed to 
encourage better understand the realities of doing business 
in Iraq.  This activity has been identified by the GOI as a 
high priority item. We expect the IPA to be launched 
shortly, following signing of joint letter of intent by 
USAID and the Ministry of Planning at the July 10-11 Joint 
Committee on Reconstruction and Economic Development 
(JCRED). 
 
17. (U) ECONOMIC TRADE ZONES - Economic zones are aimed at 
encouraging more investment and improving Iraq's 
competitive position in the global economy. Typically, 
businesses inside an economic zone receive many benefits 
including tariff and duty exemptions, land at less than 
market prices, reduced cost on utilities, and other 
benefits designed to help new businesses compete in today's 
market. 
 
18. (U) The USG, through IRMO, is currently working on the 
establishment of an Economic Trade Zone (ETZ) in Iraq. 
This includes managing a pilot program to set up economic 
trade zones in urban hubs to ease the entry of imports and 
create economic stimuli in targeted areas.  This project is 
also designed to coordinate the construction of supporting 
infrastructure and security within the ETZ as well as 
helping determine changes to be made to existing regional 
and national business regulations.  The first master plan 
and program for an ETZ will be completed later this year in 
Sulayamaniyah. A private company will eventually take over 
management of the Sulayamaniyah Economic Trade Zone. At the 
national level, the ETZ project will also fund and conduct 
a countrywide study to identify those urban hubs most 
suited for establishing and developing trade or industrial 
development zones. 
 
------------------------ 
AGRICULTURAL DEVELOPMENT 
------------------------ 
 
19. (U) Iraq's agriculture sector has great potential to 
create jobs and provide an alternative to oil as a source 
of revenue and economic growth. Reform of Iraq's public 
distribution and agricultural subsides will be essential to 
create the environment for agriculture to thrive. Through 
the Agriculture Reconstruction and Development Program for 
Iraq (ARDI) project, USAID is working with the Ministry of 
Agriculture (MOA) and the private sector to reinvigorate 
local production and markets.  Areas of emphasis include 
encouraging agro-enterprise development, policy and legal 
reform, and targeted technical and infrastructure 
interventions to help Iraq modernize this important 
economic sector.  USAID also is helping to analyze and to 
restore economic, social, and environmental systems in the 
southern Iraqi marshlands through agriculture, livestock, 
fisheries, and monitoring activities.  Also, cereal 
production improvements to wheat, barley, and maize systems 
from seed-to-sale are being pursued for greater food 
security.  Livestock improvement also is being addressed 
with an initial emphasis on improving animal health 
services especially for sheep and poultry.  Date palms, 
olives, horticulture, and beekeeping are receiving 
assistance as part of the high value agriculture 
component.  Capacity building though the private sector 
development component is strengthening trade associations, 
cooperatives, joint ventures, agricultural credit 
associations, and machinery rehabilitation.  Broader macro- 
level assistance to transform Iraq's agricultural industry 
into a market driven contributor to the economy will be 
addressed in a subsequent cable. 
 
20. (SBU) COMMENT:  Rapid development of the private sector 
-- especially micro and small and medium businesses, which 
are the primary drivers of job creation -- is critical to 
Iraq's recovery and long-term stability.  However, the 
private sector faces a daunting array of challenges in the 
legacy left by years of state control and isolation from 
the international economic system.  Minister of Planning 
Barham Saleh recognizes this and has highlighted promotion 
of private sector development and investment as a primary 
Mission of his ministry.  He will outline this vision at 
the July 18-19 donors conference in Jordan.  To spur the 
Iraq's development as a stable, market-oriented democracy, 
the USG and other donors need to continue to make a strong, 
sustained and focused effort to help the ITG eliminate 
impediments and provide the incentives for rapid growth of 
the private sector. END COMMENT. 
 
SATTERFIELD