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C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 000460 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 02/14/2016 
TAGS: ECON EFIN EINV KPRV PGOV PREL IZ
SUBJECT: MINISTRIES PURSUE AD HOC PRIVATIZATION (OR IS IT 
REHABILITATION?) PLANS 
 
Classified By: Economic Minister Counselor Tom Delare for reasons 1.4 ( 
b) and (d). 
 
¶1.  (C/REL GBR AUS) Summary.  Various Iraqi ministries are 
leading initiatives to privatize state-owned enterprises. 
Recently endorsed by a Council of Ministers order, these 
initiatives (of which the Ministry of Industry and Minerals' 
plan to sell two cement companies is the most-developed) are 
at various levels of planning.  With current plans allowing 
the state to retain controlling rights over companies and 
with private investors accepting the liability of funding a 
redundant workforce, it is unclear whether any investors will 
express interest.  It is clear, however, that ministries are 
unwilling to wait until the government develops the political 
will to create a central privatization agency with uniform 
rules.  End summary. 
 
----------------------- 
MIM Leads the Charge... 
----------------------- 
 
¶2.  (C/REL GBR AUS) The Ministry of Industry and Minerals 
(MIM), Ministry of Trade (MoT), and the Ministry of Housing 
and Construction (MoCH) have all expressed interest in 
increasing private sector ownership or investment in their 
state-owned enterprises (SOEs).  MIM, which owns the majority 
of Iraq's 192 SOEs, has taken the lead with an "experimental 
plan" to create joint stock companies out of six SOEs and two 
SOE-owned factories chosen primarily for their attractiveness 
to foreign investment and potential profitability.  With the 
current high demand in Iraq for cement, MIM is focusing 
particular attention on two cement factories in Kufa (near 
Najaf) and Sinjar (in Ninewah province), and has already 
drafted valuation studies and a proposed conversion plan. 
 
¶3.  (SBU) MIM's plan calls for the government to retain at 
least 15 to 24 percent ownership of the cement factories 
after the sale, with 25 to 40 percent going to a strategic 
partner and up to 15 percent sold to ministry and cement 
company employees.  It restricts workforce restructuring (a 
crucial issue that any real privatization plan must address) 
by guaranteeing that all employees in both factories will 
retain their jobs and that workforce reductions will only be 
conducted through staff retirements and resignations.  The 
sale of Kufa and Sinjar will not effect the SOE status of 
their parent companies, the Northern and Southern Cement 
State Companies.  An integral part of MIM's plan is to 
attract foreign investment via the sale of cement company 
shares on the Iraqi Stock Exchange; however, foreign 
investment on the stock exchange will not be available until 
automation is complete in late 2006.  (Note:  This raises the 
issue of whether MIM adequately coordinated their plan with 
other government agencies.  End note.) 
 
--------------------------------------------- ------ 
...With the "Approval" of the Council of Ministers... 
--------------------------------------------- ------ 
 
¶4.  (SBU) An inter-ministerial committee convened in August 
2005 to study the privatization and submitted a report to the 
Council of Ministers (CoM) at the end of October.  Comprised 
of the Ministers of Planning and Development Cooperation, 
Industry and Minerals, and Finance, the committee put forward 
ten recommendations, the most important of which advocated 
the comprehensive, centralized "rehabilitation" of SOEs via a 
central agency to be created by new legislation. 
 
¶5.  (SBU) At the same time, however, the inter-ministerial 
committee embraced MIM's "experimental plan" and recommended 
other ministries look into similar SOE restructuring pursuant 
to existing laws, recognizing perhaps that, politically, it 
would take some time for a new privatization law to be passed 
and a functioning central agency to be established.  (Note: 
Current Iraqi Law 22 of 1997 on State Companies, Articles 35 
and 36, allows for the conversion of a state company into a 
joint stock company upon approval by the CoM after 
presentation by the ministry of a financial and technical 
evaluation of the proposed conversion.  End note.) 
 
¶6.  (SBU) On December 18, the CoM issued an order accepting 
the inter-ministerial committee's recommendations for a 
central "rehabilitation" agency, but also perversely included 
an endorsement of MIM's "experimental plan."  MIM is 
currently redoing its valuation report of the cement 
factories for consideration by the CoM. 
 
----------------------------------- 
...And Others Jump on the Bandwagon 
 
BAGHDAD 00000460  002 OF 002 
 
 
----------------------------------- 
 
¶7.  (C/REL GBR AUS) While MIM is in the lead with regard to 
ministry-led SOE reform, other ministries are beginning to 
follow suit, as fiscal disciplines imposed by the Ministry of 
Finance force ministries to look for new ways to shrink 
overhead.  In the past month, the Ministry of Trade created a 
working group chaired by the Director General for Private 
Sector Development, Abdul Hadi al-Hamiri, to oversee the 
privatization of MoT's State Company for Shopping Centers. 
According to Hamiri, the MoT is looking at all options under 
existing law, but he acknowledged that the problem of what to 
do with excess workers would be a major obstacle.  Similarly, 
the MoCH has looked at privatization but is reluctant to 
pursue it until the government implements a comprehensive 
plan to deal with redundant workers.  In the interim, the 
MoCH has leased several asphalt plants (and is in the process 
of developing tenders to lease more) to private companies 
that rehabilitate the plants, operate them for five years, 
and return them to the ministry.  However, interest in 
privatization at MoCH is increasing as it struggles to find a 
way to keep its 15 SOEs with a total of over 9,000 employees 
afloat. 
 
------- 
Comment 
------- 
 
¶8.  (C/REL GBR AUS) The CoM's endorsement of both a central 
"rehabilitation" agency and individual ministry initiatives 
have left it unclear whether the GOI is committed to a 
comprehensive plan for genuine privatization.  Beyond the 
troubling use of the word "rehabilitation" in place of 
"privatization," the endorsement of MIM's plan means that 
ministries can pursue privatization at their own pace, 
although it does not compel them to initiate a program. 
 
¶9.  (C/REL GBR AUS) With 192 SOEs employing an estimated 
510,000 people, according to World Bank estimates, the budget 
currently running at a deficit, and oil revenues down 
approximately 700 million dollars in the first six weeks of 
2006 alone, the GOI can ill afford to turn its back on the 
issue of privatization.  However, the unanswered questions 
are many.  Will these initiatives attract any interested 
purchasers?  If it occurs, will the transfer of ownership 
occur in a transparent manner?  How will these ad hoc plans 
deal with the larger issue of redundant employees, or impact 
central government subsidy reform or social safety net plans? 
 What, if anything, will compel ministries to coordinate with 
other government agencies?  These are questions that the 
Embassy is working upon as we urge the GOI to make this 
process less of a means to keep SOEs on life support and more 
a means to push the Iraqi economy into the market. 
KHALILZAD