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Cablegate: Promoting Private Sector Development (Part 1)

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 BAGHDAD 002839

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EINV IZ ECON
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

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