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Cablegate: Three State-Owned Enterprises Find Strategic Partners

VZCZCXRO0612
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0088/01 0130223
ZNR UUUUU ZZH
R 130223Z JAN 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5185
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 000088

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EIND ECON EFIN IZ
SUBJECT: THREE STATE-OWNED ENTERPRISES FIND STRATEGIC PARTNERS

1. (SBU) SUMMARY: Three cement plants in Iraq have found joint
venture partners in consortia built in each case from different
European firms joining with separate Iraqi partner companies. The
deals are not final -- negotiations may take several more months --
and are to be developed around production-sharing contracts and
equity investments, thus are not privatizations, in that the
Ministry of Industry and Minerals retains ownership. But the
consortia will be responsible for management, purchase of inputs and
payment of employee salaries in exchange for a specified share of
the physical output over a 10- to 15-year term. To make the deals
work, each of the consortia must make substantial (multi-million
dollar) investments in plant and equipment modernization. The
production sharing model should allow the companies to recover that
investment in 3-4 years. END SUMMARY

2. (SBU) Minister of Industry and Minerals (MoIM) Fawzi Hariri told
EMIN on January 9 that the Ministry was finalizing a short list of
joint venture projects to be announced imminently. The Ministry had
begun in May 2005 with basket of 13 state-owned companies thought to
be able to generate operating profits if they could attract a
strategic partner for a joint venture. The basket was culled after
several meetings with prospective partners to four state-owned
enterprises (SOEs) in the cement sector. Hariri reported to EMIN
that a meeting in Jordan to finalize preliminary partnership
agreements, to finish January 10, would likely settle on two,
possibly three handshakes that would then proceed to negotiations
for the final terms of the joint venture agreements.

THE COMPANIES
--------------

3. (SBU) Per the Minister's information, it appears that cement
plants in Al Anbar, Kirkuk (At Tamim), and Al Muthanna provinces are
a step further toward productive joint ventures. Three consortiums
are the "selectees". the first is a partnership between an Iraqi
firm, Al Jawhara Al Khalijiyah, and a Romanian partner Uzen. They
are to partner with the MoIM to restart the cement plant at Al
Qa'im, at the Syrian border in Al Anbar. In Kirkuk it is a
partnership among the Iraqi company Al Sharq Al Awsat and an
unidentified German company. Last, in Al Muthanna, the partnership
is between the German firm KHD and an Iraqi company called the
Economic Group. While the Minister had briefed that different
consortia seemed headed toward getting the nod in Al Muthanna -- he
had pointed to a Swiss-led consortium -- and had expected a French
firm to partner in Karbala, in the event Karbala seems to be left in
the cold, and Al Qa'im -- initially thought to have been the hardest
to move -- has found a suitor.

THE DEAL
---------

4. (SBU) Minister Hariri set out the essential terms of the joint
ventures as follows: The strategic partner would enter into an
agreement in which the financial benefit comes from a contract for a
share of production -- these will NOT / NOT be deals in which the
partner takes an equity position. The strategic partner could take
up to 65% share of the production -- subject to negotiation -- with
the Ministry retaining the balance. The life of the production
sharing contract would be 10 to 15 years.

5. (SBU) The strategic partner for its part would invest on the
order of $100 million in the SOE, the Minister said. The partner
would also be responsible for employee salaries and -- critically --
company management. These terms as described are the framework for
the deals. Once the announcement of the selectees is made, a
negotiation process would begin, with the agreements to be finalized
over the next several months. Minister Hariri said that the
consulting firm of Grant-Thornton, part of DOD Deputy Under
Secretary Brinkley's Task Force to Improve Business and Stability

SIPDIS
Operations in Iraq (TFBSO), is to provide legal technical assistance
in the negotiations toward final contracts.

THE ANNOUNCEMENT
-----------------

6. (SBU) The Minister said he expected the two, possibly three
selectees to be determined at the end of the January 9-10 meeting in
Jordan. He would present the joint venture concept to the Council
of Ministers (CoM) on Monday, January 14, and make a formal
announcement at a press conference the following Tuesday.

WHAT'S NEXT
------------

7. (SBU) Minister Hariri said the next phase of his efforts to
restructure the SOE sector would be to build another basket of
target companies -- this time as many as 30 -- that may become
attractive targets if they first were to receive an infusion of
investment from the capital budget. He provided EMIN with a list of
some 21 companies that were his priority recipients for up to $300
mn in total capital investment in 2008 (emailed to NEA/I-ECON). He
explained that, in deciding between whether to divide the $300 mn

BAGHDAD 00000088 002 OF 002


evenly among provinces, or to focus funds on SOEs with greatest
turn-around potential, his list reflects the latter option.

8. (SBU) Hariri said he was ready to issue 16 tenders just as soon
as the CoR has approved the national budget. He has made it his
goal to have all $300 mn committed by August 31, in order to be well
placed to request a budget supplemental for the SOE sector.

CROCKER

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