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Cablegate: The Two Biggest Concerns of Local Businessmen

VZCZCXRO3836
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2651/01 2321144
ZNR UUUUU ZZH
P 191144Z AUG 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 8942
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BAGHDAD 002651

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG EINV ETRD EFIN IZ
SUBJECT: THE TWO BIGGEST CONCERNS OF LOCAL BUSINESSMEN

REF: BAGDHDAD 2489

Sensitive But Unclassified. Please protect accordingly.

1. (U) This is a joint Baghdad ePRT 2 and Embassy reporting
cable.

SUMMARY
-------

2. (SBU) During a luncheon with Embassy econoffs and Baghdad
ePRT #2 members, businessmen from the Karada district of
Baghdad said lack of affordable credit and reliable
electricity were the two biggest impediments to business
growth. A private banker defended lending practices,
claiming interest rates were "market-based" and encouraging
more deposit business with the private banks. A commercial
real estate developer also expressed concern over housing
regulations that prohibit him from selling deeds of
individual residential units. End Summary.

3. (SBU) On August 12, Embassy Econoffs and Baghdad ePRT #2
members attended a luncheon with prominent businessmen from
the Karada district of Baghdad (Comment: Karada was
historically an upscale shopping and residential district and
today is one of the most secure areas of the city. End
note.) The meeting took place at the Economic and
Development Progress Center (EDPC), a business development
and training center established with Quick Reaction Funds
requested by Baghdad ePRT #2. Iraqi businessmen included the
owners of a flour mill, a commercial real estate development
firm, an aluminum construction materials plant, a plastics
factory, a retail food market, a food distribution company,
and an air freight company.

BUSINESSMEN RAIL AGAINST BANKS
------------------------------

4. (SBU) The businessmen cited poor access to affordable
credit as a key impediment to business growth. The owner of
a flour mill said the high cost of credit meant his company
could not use bank loans to expand. He also said Ministry of
Industry and Mineral loans of up to USD 50,000 USD for small
to medium-sized businesses (reftel) were too small to be
useful; such a loan would not even cover diesel fuel costs to
support his generators for more than a few months. A shop
owner in the Karada market, said he never had access to
credit. In addition to high interest rates, he complained
about the banks' requirements for loan guarantors. A
commercial real estate developer said his company faced
difficulty borrowing against assets. "How can I grow, if I
can't mortgage my properties?" He put part of the blame on
the lack of credit bureaus that would allow banks to rate the
reliability of borrowers. As a result, he said, people are
normally able to borrow only from people who know them well,
so that access to credit is based almost exclusively on
family connections.

...AND THE BANKER RESPONDS
--------------------------

5. (SBU) The president of a large private bank explained that
interest rates depend on market conditions. "There is
nothing for free," he said. He said his bank offers
short-term loans of one year, and long-term loans of up to
three years. But most entrepreneurs in Iraq do not
understand what banks can do, how they manage risks, or how
to do business with them, he said. The banker stated
potential borrowers should first set up deposit accounts with
the banks. By establishing such a relationship first, he
explained, bankers will have greater knowledge of borrowers'
ability to pay back loans. The businessmen, however,
expressed reluctance to deposit money at private banks
because they lack the full faith and credit of the
government. "We will only put our money with the state
banks, where it is safe," said the Karada market shop owner.

ELECTRICITY NEEDS
-----------------

6. (SBU) All businessmen in attendance said the lack of
reliable electricity and the high cost of diesel fuel to
power their own generators significantly affect their
businesses. The owner of Al-Haibd Distribution Company
stated his company was forced to purchase diesel fuel from
the black market for both cold storage and his fleet of
trucks. Having to pay black market prices, he explained, was
therefore driving up the price of food. Due to such
challenges with cold storage, his company does not import any

BAGHDAD 00002651 002 OF 002


products requiring refrigeration. In addition, he complained
that the Ministry of Electricity arbitrarily estimates an
increase in electricity usage when billing his business each
month. Security problems had kept the Ministry from sending
people out to read meters. The Karada market shop owner said
electricity was an even greater problem than lack of credit,
stating, "Relatives can give me money, but they can't give me
electricity." He estimated 75 percent of his profit margin
goes to covering his electricity costs, and complained his
electricity often fails during peak business hours. Both he
and the flour mill owner said monthly diesel fuel costs to
run a generator average 1.5 million IQD (1,285 USD).

REAL ESTATE CONCERNS ALSO SURFACE
---------------------------------

7. (SBU) While highlighting Iraq's high demand for housing,
the commercial real estate developer said antiquated housing
regulations are deterring him from building apartments to
meet this demand. He specifically criticized a law that
prevents private developers from selling title to individual
apartment units. Under this regulation, he said, home buyers
can purchase an equity share in the building, but not
purchase a unit - with deed - individually. He stated this
discouraged him from building private residential units,
explaining, "I do not want to be a landlord. I want to build,
sell, and take my profit." He and other developers
reportedly met recently with Deputy Prime Minister Barham
Salih to raise this issue, but there had been no progress on
it. The developer also said Baghdad has a significant
deficit of hotel rooms, with only 2,000 available in the
city. He said he wanted to build a hotel, but complained
about a municipal regulation that prohibits the construction
of hotels over eight stories. "Let's get this changed, and I
will build a huge hotel," he said.

COMMENT
-------

8. (SBU) Despite the many challenges they face, all of these
businessmen said they are making money in the Iraqi economy.
All were also reluctant to become engaged politically to
bring about the changes they claimed were necessary.
Security was a theme that came up less frequently than
expected. Several acknowledged that the security situation,
while fragile, was no longer the most challenging obstacle to
do business. EPRT #2 will continue working with these and
other business owners through the EDPC to build a business
association that could mobilize support for regulatory and
legal changes to stimulate further business growth. End
Comment.
CROCKER

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