VZCZCXRO6864
PP RUEHBC RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2744/01 2131103
ZNY CCCCC ZZH
P 011103Z AUG 06
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 6012
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002744 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 07/31/2016 
TAGS: PREL EAID ECON EINV KPRV IZ
SUBJECT: CORRECTED COPY - IRAQ: STAYING CLEAR OF THE MESS 
AT STATE-OWNED ENTERPRISES 
 
REF: A. BAGHDAD 2716 (NOTAL) 
     ¶B. BAGHDAD 2375 (NOTAL) 
 
¶1. (C) Summary: Econoff on July 17 accompanied a U.S. 
military team on visits to two Iraqi state-owned enterprises 
(SOEs) to assess the condition of the companies and determine 
how best to assist them to improve overall security 
conditions.  The visits illustrated difficulties in dealing 
with state bureaucracy and the risks inherent in assisting 
the GOI to revitalize its SOEs.  The visit also delineated 
the difficult challenges we face in Iraq trying to ensure 
that a security objective -- providing gainful employment -- 
does not undercut a primary economic objective -- assisting 
the transition of this state economy to market-based 
principles.  End summary. 
 
--------------------------------------------- ------------ 
Subsidy Addictions, Bloated Payrolls, Outdated Facilities 
--------------------------------------------- ------------ 
 
¶2. (SBU) The State Company for Electrical Industries (SCEI), 
which our team visited, tells a typical story of Iraq's 
entrenched state-controlled economy and the risks inherent in 
assisting the GOI to revitalize its SOEs.  SCEI, owned 
entirely by the Ministry of Industry and Minerals (MIM), 
produces a range of electrical products, including 
generators, air conditioners, and light fixtures.  According 
to company management, SCEI sells 75% of its output to the 
Iraqi government, and the remainder on the open market at 
lower prices.  Besides government support on the output side, 
SCEI benefits from subsidized power and raw materials. 
Management told us SCEI employs 4,500 workers, 30% of whom 
actually work.  The remainder of SCEI's workforce stays home, 
and they are compensated at 65% of their normal salary to do 
so.  Salaries of full-time employees are paid out of company 
earnings; those of stay-at-home employees are covered by the 
Ministry of Finance (MoF).  SCEI's facilities and processes, 
though well-maintained, are outdated and noncompetitive.  As 
one engineer said after requesting help modernizing SCEI's 
technology:  "We're stuck in the 80's!" 
 
¶3. (SBU) SCEI management told us SCEI is operating at no more 
than 20% of its capacity, running one seven-hour shift five 
days per week, mainly because government-provided power 
supplies are inadequate.  Indeed, management believes the 
government's failure to adequately support SCEI is the main 
cause of all the SOE's problems, particularly its inability 
to provide a secure environment for SCEI's workforce as it 
goes to and from work.  (A firefight between unidentified 
combatants broke out directly across the street from SCEI 
during our visit and lasted approximately 40 minutes.) 
 
¶4. (SBU) A close second to security failures, says 
management, is the GOI's failure to finance adequate salaries 
for SCEI's employees.  Management said the average SCEI 
worker makes approximately $300 per month (when working), 
which they argued is inadequate to support a typical Iraqi 
family.  (Note:  According to USAID's Economic Governance II 
Project, the average Iraqi family needs approximately $180 
per month, or $1 per day per individual, to survive at a 
"poverty" level.  About 20% of Iraqi households fall under 
this category and are currently eligible to receive benefits 
under the Social Safety Net administered by the Ministry of 
Labor & Social Affairs.  End note.) 
 
¶5. (SBU) SCEI management also told our team that the GOI 
should erect protective barriers against unfair Chinese 
competition, including tariffs and "buy-Iraq" laws.  "Our 
quality is better," said one manager, "but their prices are 
lower." 
 
-------------- 
Not Getting It 
-------------- 
 
¶6. (SBU) SCEI management also laid out what they hoped the 
USG could do for them:  "What kind of technology can you 
provide?"  "What kind of access to money do you have?" "Can 
you link us up with foreign investors?"  SCEI management 
believes that if only they could revitalize their operations, 
upgrading equipment and hiring back non-working employees, 
then they could operate at full capacity.  They made no 
mention of the need to understand changing market conditions 
and adopt flexible, innovative business practices to compete. 
 Despite our efforts to the contrary, free-market principles 
have yet to take root in Iraq's SOEs. 
 
¶7. (C) Deputy Minister Sami of the Ministry of Industry & 
Minerals (MIM), which owns the largest share of Iraq's SOEs 
at 31%, told Embassy officials July 24 that the public sector 
is currently the best source for employing Iraqis because the 
private sector is "too weak" (ref A).  This tracks with the 
 
BAGHDAD 00002744  002 OF 003 
 
 
2006 year-to-date increase in SOE employment from 
approximately 500,000 to 600,000 employees (most of whom 
appear to be not working).  DM Sami said he strongly favors 
private sector development, but that the GOI needs to 
"rehabilitate" its SOEs.  His long-term vision (five years 
out), he told us, includes retained government ownership in 
"privatized" SOEs.  His vision also seems to include a larger 
MIM profiting from "rehabilitated" SOEs.  The main problem, 
as DM Sami pointed out to us, is that the GOI does not have 
the money necessary to perform successful "rehabilitation." 
 
------------------ 
A Typical Scenario 
------------------ 
 
¶8. (SBU) SCEI is typical of Iraq's approximately 192 SOEs. 
Even the GOI's most profitable SOEs are highly dependent on 
subsidized inputs and outputs, probably incapable of 
operating profitably without them (ref B).  From a facilities 
perspective, SCEI is probably better off than most of Iraq's 
SOEs.  The Modern Sewing Company, which we visited the same 
day, is even less competitive:  its equipment is older and 
not as well-maintained; its buildings are in poor condition; 
and it has a constant stream of sewage running onto the 
grounds, which the management is attempting to dilute by 
mixing regular water with the sewage. 
 
--------------------------------- 
Injecting Ourselves into the Mess 
--------------------------------- 
 
¶9. (SBU) The U.S. goal is to help Iraq reform its 
dysfunctional economy by moving away from government control 
of industry to a competitive free-market economy.  The GOI 
has been reluctant to pursue privatization for a number of 
reasons, chiefly a fear that those presently on the payroll, 
including employees who do not work, will be unable to find 
other employment. 
 
¶10. (C) Multi-National Corps - Iraq (MNC) shares the Mission 
goal of eventual privatization, but has its own overriding 
objective of improving the security environment by improving 
economic conditions.  MNC's central, but untested, assumption 
is that improved economic conditions, measured both by job 
creation and psychological effects (i.e. increased confidence 
of area residents), will lead to fewer attacks against 
Coalition Forces and innocent Iraqis.  (Note:  Not all 
elements of the Mission agree with this assumption, as the 
correlation between high unemployment and frequency of 
anti-coalition attacks is not robust.  Moreover, the 
advantages provided to SOEs can be seen as inhibiting to 
private-sector activity that might potentially have a greater 
economic impact.  End note.)  As a means to achieving this 
greater security, MNC is spending CERP (Commander's Emergency 
Response Program) money to assist Iraqi SOEs in strategic 
areas. 
 
------------------ 
Confusing Signals? 
------------------ 
 
¶11. (C) MNC's efforts are currently limited to human capital 
capacity building (providing training and assistance in 
creating business and marketing plans) and assistance in 
obtaining contracts.  At Hateen Industrial Complex in 
Iskandaria, for example, MNC is using CERP money to train 
Hateen management on basic business principles.  MNC has also 
contracted Hateen to paint humvees, and has persuaded the 
Ministry of Interior to contract with Hateen on various 
projects, such as constructing living containers and buses. 
(Prior to the war, Hateen was primarily a bus, truck, and 
military vehicle factory.) 
 
¶12. (C) Considering MNC's limited budget for SOE assistance 
and the immense effort expended just to set up business 
training for Hateen management, it is unlikely that MNC's 
efforts can extend to significant "rehabilitation," such as 
procuring new equipment lines or refurbishing obsolescent 
facilities.  Nonetheless, MNC runs the risk of creating false 
expectations through its assistance efforts.  During our 
meeting with SCEI management, it was apparent they hoped for 
a savior to inject much-needed funding into their largely 
moribund operations.  Civil Affairs teams have visited SCEI 
in the past, prior to MNC's new mandate to assess SOEs and 
determine best ways to assist in order to improve security 
conditions.  As a result, SCEI is currently a bit skeptical 
about possible outcomes of this newest lookover: "We've been 
down this road with you before, and nothing happened." 
 
¶13. (C) Also, in the absence of an effective privatization 
law, MNC is injecting the USG into a SOE rejuvenation process 
that may or may not end up in privatization.  The danger is 
 
BAGHDAD 00002744  003 OF 003 
 
 
that in pursuit of important short-term objectives, USG 
actions may keep an effectively bankrupt system of 
government-controlled enterprises on temporary life support. 
Worse yet, we may be unwittingly aiding corrupt GOI officials 
who intend to use rehabilitated SOEs as revenue generators 
for political or personal purposes. 
 
-------------------------- 
Maintain the Middle Ground 
-------------------------- 
 
¶14. (C) Embassy wishes to avoid moving in contradictory 
directions on the issue of SOE assistance.  Given the 
security interests involved, we will continue careful 
coordination between Embassy, MNC, and the GOI to maintain 
the current middle ground: As MNC provides very limited, 
carefully considered assistance, based on realistic 
assessments of conditions in Iraq's SOEs, Embassy will 
aggressively press the GOI to pass a privatization law.  We 
believe this law will be necessary to create a transparent 
and independent oversight agency, come to grips with the 
economic realities of the SOEs, and develop a plan to protect 
and assist workers who will eventually be displaced by 
privatization. 
 
--------------------------- 
Continuing to Work Together 
--------------------------- 
 
¶15. (C) At the same time, Embassy will continue traveling 
with MNC as they visit and assess SOEs around Iraq.  The 
combined trip of July 17 was beneficial in that it enabled 
EconOff to observe firsthand SOE operations and develop 
relationships with SOE management.  It was also an 
opportunity for Embassy to explain our policies to the troops 
in the field, who more often deal with mid-level Iraqis and 
are in a better position to influence them. 
 
¶16. (C) Post appreciated the cordial welcome extended to 
Econoff by the MND-B G9 Public Administration Team, MNC-I C9, 
4th Brigade Combat Team/101 Airborne, and A Company/414 Civil 
Affairs Battalion, and the excellent spirit of cooperation in 
including him in their assessment operations.  Their 
professionalism throughout the mission was impressive. 
SCOBEY