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Cablegate: Dialogue On Economic Cooperation: Sessions On

VZCZCXRO7738
PP RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHC #3362/01 3071739
ZNR UUUUU ZZH
P 031716Z NOV 09
FM SECSTATE WASHDC
TO RUEHGB/AMEMBASSY BAGHDAD PRIORITY 9336
INFO IRAQ COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 04 STATE 113362

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON EINV ETRD IZ
SUBJECT: DIALOGUE ON ECONOMIC COOPERATION: SESSIONS ON
INVESTMENT, TRADE, AND PRIVATE SECTOR DEVELOPMENT

1. (SBU) SUMMARY: The afternoon sessions of the October 19
Dialogue on Economic Cooperation (DEC) focused on trade,
investment, industry, and private sector development.
Throughout these sessions, USG and Government of Iraq (GOI)
interlocutors acknowledged that Iraq's investment climate was
"improving," and cited the recently passed amendment to the
National Investment Law as a positive signal to potential
investors. The GOI representatives also mentioned progress
in resolving outstanding business cases and on World Trade
Organization (WTO) accession. Nevertheless, both sides
agreed that unresolved issues continued to harm investment
and trade, including lack of passage of key bilateral
agreements, the continued use of Arab League Boycott
language, and overbearing government involvement in key
sectors such as aviation and telecommunications. These
sessions were co-chaired by Acting Under Secretary of
Commerce (U/S) for International Trade Michelle O'Neill and
Iraqi Minister of Oil (MinOil) Dr. Hussain al-Shahristani.
The morning sessions of the DEC, which focused on public
financial management, financial services, and energy, will be
reported separately.

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Investment and Trade
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2. (SBU) U/S O'Neill opened the afternoon session by
highlighting the participants' common purpose of furthering
bilateral economic cooperation and encouraging U.S.
investment in Iraq. She also provided an overview of the
issues under discussion, touching upon investment
commissions, outstanding problem cases, key bilateral
agreements, the National Investment Law, and World Trade
Organization accession. MinOil Shahristani acknowledged the
GOI's commitment to improving the investment climate, and
highlighted the October 13 passage of the first amendment to
the National Investment Law (No. 13) as a positive signal to
potential investors.

3. (SBU) Responding to U/S O'Neill's request for an update on
the status of the National Investment Commission (NIC) and
Provincial Investment Commissions (PICs), Dr. Sami al-Araji,
NIC Chairman, explained that the recently-passed amendment to
the National Investment Law also places heavy emphasis on the
relationship between the NIC and the PICs. He elaborated
that the PICs were not under the control of the NIC, which
was meant to mitigate the potential for political influence.
Dr. Sami said that, under the new amendment, the PICs would
be given more authority to encourage and work with foreign
investors, within the framework of the national investment
plan. Dr. Sami recognized the potential for and encouraged
PICs to partner with those states in the United States that
shared commonalities in agriculture, oil, and gas, for
example.

4. (SBU) Dr. Sami added that the new amendment allowed
foreigners to own land for housing projects and placed other
land designated for investment projects under the authority
of the NIC instead of different ministries. Dr. Sami
stressed that the NIC was cooperating with the PICs to
appropriate land in accordance with national and provincial
investment plans. The amendment also secured privileges for
public-private partnerships, especially those involving
state-owned enterprises, and reduced the review period for
project applications from 45 to 15 days. Dr. Sami announced
an upcoming private investment real estate development that
will create 500,000 residential units throughout Iraq.

5. (SBU) U/S O'Neill and Embassy Baghdad Minister-Counselor
for Economic Coordination John Desrocher raised specific
outstanding problem cases and business disputes: GE power
turbines; OMMA Healthcare's proposal to build a hospital in
Baghdad; Iraqi Airways' air-cargo monopoly; and a plan to
create a new, state-owned mobile telecommunications company.
Desrocher called for a return to a more open air-cargo
market, and encouraged that the government not be an operator
in the telecommunications sector but remain only an
independent regulator. Dr. Sami reiterated that the Iraqis
were working through these and other investment challenges by
establishing a legal committee to examine the issues and an
investment court to help resolve disputes. GOI is exploring
the New York Convention on Arbitral Awards, but are also
looking into other mechanisms (i.e. London and Paris
conventions) to see which one is most suitable for Iraq. On
GE, he suggested that the recent payment, made possible by
issuing treasury bills through the Central Bank of Iraq, was

STATE 00113362 002 OF 004


evidence of the GOI's commitment to meeting its financial
obligations and stressed that the GOI was concentrating on
future payments. Regarding other outstanding issues, such as
OMMA Healthcare's aborted hospital construction bid,
air-cargo disruption, and the challenges posed by a
state-owned telecommunications carrier, Dr. Sami indicated
that the GOI was aware of these issues. He also noted that
there might have to be a compromise because local enterprises
do not want to be shut out of the market by international
companies and that further discussion was possible during the
BIC. On the air-cargo issue, Shahristani seemed genuinely
surprised by the news of the FedEx pullout and stressed that
problems like the air-cargo situation, if they could not be
resolved by the appropriate ministry, should be taken up by
the Council of Ministers.

6. (SBU) U/S O'Neill also requested that the GOI eliminate
Arab League Boycott (ALB) language from tenders, mostly a
problem with Health Ministry tenders. Acting Minister of
Trade (MinTrade) Safaa al-Deen al-Safi noted Iraq's
obligations under its multilateral agreements with countries
that adhere to the ALB. Ambassador Haslach cautioned against
the potential loss of tax benefits and disincentive to
investors if ALB language is retained, and noted that many of
Iraq's neighbors have found ways around the ALB obligations.
In response, MinTrade al-Safi said that the GOI would
consider examples set by other countries in dealing with the
matter in view of their international obligations.

7. (SBU) U.S. Export-Import (Ex-Im) Bank Senior Vice
President John McAdams assured the GOI representatives that
Ex-Im Bank was very open to working with Iraq, and would
review its risk rating for Iraq following the International
Monetary Fund's (IMF) upcoming country report on Iraq. He
indicated, however, that to undertake significant projects,
Ex-Im would need to put the risk on a third party. He noted
that investors needed insurance and guarantees and that the
GOI had to provide risk mitigation and a reasonable assurance
of repayment, stressing that proceeds from oil sales could
pay off infrastructure debt. MinOil Shahristani stated that
"Iraq is a country that can pay off its debt," adding that an
oil deal had been approved only days before and that two more
would be initiated in a few days. However, he also countered
that many U.S. regulators hinder investment in Iraq and that
it is not solely the issues in Iraq that prevent investment.

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TIFA AND WTO DISCUSSION
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8. (SBU) Moving to trade issues, Deputy Assistant United
States Trade Representative for WTO and Multilateral Affairs
Bruce Hirsh led the discussion, urging the GOI to ratify the
bilateral Trade and Investment Framework Agreement (TIFA),
which has been pending approval since 2005. He explained
that ratification would send an important signal that the
bilateral economic relationship had matured by expanding
trade ties between our two nations. MinOil Shahristani
declared that the GOI fully supported the TIFA, but he
cautioned that delays in Iraq's parliament are usually
politically motivated. Nevertheless, Shahristani said the
GOI was hopeful that the new parliament would ratify the
U.S.-Iraq TIFA after the January 2010 elections, with
ratification of other bilateral agreements to follow.

9. (SBU) MinTrade al-Safi stated that the GOI was maintaining
a steady course toward accession. He assured the U.S.
representatives that the GOI was taking steps to set up a
Working Party meeting in early 2010. He noted that laws
focusing on intellectual property rights, sanitary and
phyto-sanitary measures, and technical barriers to trade had
been drafted and were under internal review, and that draft
customs legislation had been sent to the parliament. DAUSTR
Hirsh urged al-Safi to submit draft legislation to the WTO to
ensure consistency with WTO rules and to avoid having to make
future amendments to enacted legislation. He also pressed
the Minister of Trade to submit the initial goods and
services market access offers to the WTO, which was required
before the next Working Party meeting could be scheduled.
Dr. Sami Khairallah, Assistant Director General and WTO
Coordinator for the Ministry of Trade, explained that the GOI
had finalized its applied tariff schedule and had also
established the tariff bindings intended for submission to
the WTO. He noted that the bindings proposed were not
significantly higher than the applied rates. With respect to
trade in services, the GOI had reviewed and drafted a
services offer covering about 89 of 152 subsectors,
Khairallah added. The relevant Ministries gave the draft
services offer to the National WTO Committee, which reviewed
it and referred it back to the Ministries for changes.


STATE 00113362 003 OF 004


- - - -
GSP
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10. (SBU) During a discussion of the pending U.S. Generalized
System of Preferences (GSP) labor petition requesting removal
of Iraq's GSP duty-free benefits, Gregory Schoepfle, Director
of the Office of Trade and Labor at the Bureau of
International Labor Affairs, Department of Labor (DOL),
stressed the importance of labor law reform and raised the
possible withdrawal of Iraq's duty-free GSP benefits on the
basis of inadequate protection of workers' rights. MinTrade
al-Safi indicated that a new labor law had been drafted,
although further progress had been limited. Al-Safi noted
repeatedly that the draft law would improve the situation for
workers in the "private sector." He did not offer any
comment on when the draft law would be presented to
parliament or whether provisions addressing the public sector
had been removed from the draft bill. Referencing Decree
8750, by which all trade union bank accounts had been frozen,
the Minister of Trade noted that the decree had been made in
response to political activities by the unions, and that
unions could apply to the government for release of the
frozen funds after they "prove that they are on the right
track." Schoepfle offered DOL technical assistance in
preparation of the draft labor law and encouraged speedy
reform.

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- - -
Industry and Private Sector Development
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- - -

11. (SBU) Opening the second afternoon session, USAID Special
Assistant Administrator for the Middle East George Laudato
applauded the extraordinary growth in small and medium
enterprises (SME), calling it "a success story in the
making." Laudato called for the removal of restrictions in
lending, more transparency, and greater availability of
financing for SMEs throughout Iraq. Dr. Sami agreed and said
that one of the GOI's priorities was to activate 38,000-plus
registered SMEs in Iraq, half of which were "under
construction." Dr. Sami noted that, though Iraq was very
"under-banked," the GOI could borrow against existing
retirement funds and use the money for projects in private
sector development. In addition, credit unions could also
work well to finance SMEs. Dr. Sami advocated low-interest
(one to two percent) loans with long repayment periods for
SMEs, but Central Bank of Iraq Governor Dr. Sinan al-Shabibi
indicated that interest-rate policy was driven by inflation
and price stability concerns. He also noted that subsidies
were not the best option to unlocking credit, and that a
regulatory environment for this sector needed to be created.
(Comment: We have some concern with this idea, as it might
undermine the ability of private banks to fill this need.
End Comment.)

12. (SBU) In response to Iraqi requests for OPIC financing in
Iraq, OPIC Chief of Staff John Moran urged the Iraqis to pass
the Investment Incentive Agreement, which, like the TIFA, had
been pending since 2005. Reiterating the possibilities for
OPIC activities in Iraq, Moran explained that OPIC could only
invest in for-profit institutions, and that, for OPIC to
invest in CHF International (a micro-finance NGO), CHF needed
to be licensed as a non-banking financial and for-profit
institution. Dr. Sami thanked OPIC for the USD 50 million in
financing for the five-star Summit Hotel project in Baghdad,
whose construction has already begun and expected to last 24
months with planned opening scheduled for June 2011.

13. (SBU) The agricultural portion of the discussion was
abbreviated, as the Minister of Agriculture fell ill early in
the day. Nevertheless, John Brewer, Deputy Assistant
Administrator for the Foreign Agricultural Service and
USAID's George Laudato were able to note some of the legal
and regulatory measures the GOI needed to take, including
streamlining the Public Distribution System and defining the
government,s role in the agricultural sector more clearly.

14. (SBU) U.S. Trade and Development Agency (USTDA) Regional
Director Carl Kress gave a brief overview of USTDA's prior
activities in Iraq and potential for new projects. USTDA has
conducted orientation visits and training programs in several
sectors, including oil and gas, rail, and information and
communications technology. Kress said that USTDA was
exploring additional project proposals and would be inviting
Iraqi delegates to participate in its May 2010
electricity-sector conference to be held in Cairo.

15. (SBU) Desrocher closed the gathering by encouraging both

STATE 00113362 004 OF 004


sides to continue the day's constructive discussions in
Baghdad by energizing the Joint Coordinating Committee
working groups under the SFA in the coming months. MinOil
Shahristani echoed Desrocher's remarks, expressing his
appreciation for a meaningful exchange focused on building a
strong economic foundation. Shahristani agreed that the DEC
was an important basis for mutual cooperation and dialogue.
CLINTON

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