VZCZCXRO3155
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1493/01 1341527
ZNR UUUUU ZZH
P 131527Z MAY 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 7346
INFO RUCNRAQ/IRAQ COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 04 BAGHDAD 001493 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/I, S/I AND EEB 
STATE PASS OPIC:DZAHNISER AND RMOSBACHER, JR. 
USDOC FOR 4530/ITA/MAC/IIRTF/SHAMROCK 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN IZ
SUBJECT: OPIC PRESIDENT/CEO'S VISIT TO BAGHDAD -- FUTURE 
MORTGAGE FACILITY FACES POLICY, REGULATORY, POLITICAL AND 
PRACTICAL CHALLENGES 
 
REF: BAGHDAD 1389 
 
SUMMARY 
-------- 
 
¶1. (SBU) OPIC President and CEO Mosbacher's two-day visit to 
discuss a mortgage facility for low- and moderate-income 
workers was useful in allaying Post's concerns set out reftel 
regarding the risk of crowding out of a nascent private bank 
sector; the role of the Trade Bank of Iraq (TBI) in the 
facility; and OPIC's readiness to engage in an economy with 
important legal and regulatory ambiguities.  The question 
remains of undermining the GOI's monetary policy by setting 
up a facility that lends in dollars.  New issues came to 
light pertaining to the GOI ratification of the U.S.-Iraq 
Investment Incentive Agreement of 2005 as an essential legal 
framework for OPIC operations in Iraq; the extent to which a 
large number of Iraqi ministries and institutions will need 
to be brought into the approval process for the facility; and 
the conundrum of designing a mortgage product that is in fact 
affordable to the low- and moderate-income workers it 
targets.  OPIC has committed to applying the information 
acquired on this visit to a formal proposal for the facility. 
 END SUMMARY. 
 
INCLUDE, NOT CROWD OUT 
PRIVATE BANKS 
----------------------- 
 
¶2. (SBU) OPIC President and CEO Robert Mosbacher, Jr., 
visited Baghdad May 8 and 9, accompanied by Robert 
Drumheller, Vice President for Structured Finance; Rodney 
Morris, Vice President for Insurance; and Dulce Zahnhiser, 
Chief of Staff.  David Strine, Managing Director of the Iraq 
Middle Market Development Foundation, an OPIC-funded NGO, 
joined the team for selected meetings.  Although the subjects 
of increasing OPIC exposure in its SME lending and classic 
insurance products were raised with all interlocutors, the 
primary objective of the trip was to explore the feasibility 
of a pilot program for a new housing mortgage facility for 
low- and moderate-income borrowers. 
 
¶3. (SBU) Mr. Mosbacher directly addressed several of the 
concerns Post expressed reftel regarding the mortgage 
facility proposal in his call on Ambassador Crocker.  He made 
clear that OPIC proposed to partner with the Trade Bank of 
Iraq (TBI) solely as an institution to share risk and provide 
additional resources to the pilot -- perhaps even shouldering 
the preponderance of risk.  OPIC's intention was to push the 
administration of loans and the assessment of individual 
borrowers into appropriate private sector banks such as 
Credit Bank of Iraq or Baghdad Bank.  OPIC training would 
build these lenders' back-office capacity and ability to 
assess risk and administer loans, in keeping with OPIC's 
development mandate.  The objective would be building rather 
than crowding out the private sector, and avoiding the 
creation of another state-owned lending institution.  Opening 
participation to banks with Western partners could engage 
these well developed institutions in building Iraqi financial 
intermediation capacity, and perhaps engage the capital of 
those institutions. 
 
¶4. (SBU) The OPIC team took on board the more complex 
question of making a lending facility denominated in dollars 
and lending at interest rates based on the U.S. Federal Funds 
rate compatible with Central Bank of Iraq (CBI) monetary 
policies aimed at de-dollarization of the economy and 
strengthening CBI control over monetary conditions.  Post 
stressed that USG initiatives must accommodate the time 
needed for eventual reductions in the CBI's policy interest 
rate in line with the successful lowering of core inflation, 
which has remained stuck around 12 percent in recent months 
and may spike again on the back of expected GOI wage 
increases. 
 
WANTED: A HOUSING 
CONSTRUCTION INVESTOR 
---------------------- 
 
¶5. (SBU) Discussion of the need for builders to have the 
assurance of an immediate "take out" dominated the OPIC 
team's meeting with Ministry of Finance Senior Advisor Dr. 
Aziz Hassan Ja'far.  Dr. Aziz stressed that Iraq does not 
have builders with deep enough pockets to enable them to 
construct "on speculation".  The builder must be able to get 
 
BAGHDAD 00001493  002 OF 004 
 
 
the cost of the construction out of the project as soon as it 
is completed, he said.  He noted that this requirement 
currently holds for all parties to significant construction 
projects in Iraq.  Investors, designers, contractors, 
builders, suppliers -- none can wait the 20 years of a 
mortgage to recoup their outlays, and Iraqi banks are 
currently insufficiently capitalized to provide the "take 
out" up front, he said.  The OPIC team stressed that it was 
precisely this lack in the financial intermediation system 
that the pilot mortgage facility sought to address.  Dr. Aziz 
promised that if there are builders and financing able to do 
the projects, Iraq has the land, materials and labor to 
"build housing for 30 years -- we need 2.5 million units!" 
 
¶6. (SBU) Dr. Aziz suggested that, on the specific question of 
land, the Ministries of Finance and of Municipalities could 
be counted upon to allocate appropriate parcels (as the 
majority holders of property rights in the country).  He said 
it should be feasible to remove the cost of land from the 
price of the resulting housing, reducing the mortgage burden 
to the borrower. 
 
TBI MUST GET ITS 
BOOKS IN ORDER 
----------------- 
 
¶7. (SBU) The OPIC Team continued in person their ongoing 
correspondence with the President and Chairman of the TBI, 
Hussein Al-Uzri, focusing on details of the proposal, and the 
Bank's uncertain bookkeeping.  Mr. Mosbacher proposed that 
TBI take on more than half of the financing risk for the 
mortgage facility, stressing OPIC's limited Congressional 
appropriation for credit subsidies.  He noted that along with 
asymmetrical risk sharing, OPIC was serious about building 
private sector banking capacity through limiting TBI's role 
to provision of capital.  Given that the Iraqi housing market 
is characterized by nearly unlimited demand, the OPIC team 
asked how the mortgage facility pilot could be tested in a 
limited amount of time.  They asked for Al-Uzri's opinion on 
whether it would be possible to set up a single entity 
financier/builder, and whether it was in fact feasible to 
expect the GOI to provide land free of charge. 
 
¶8. (SBU) Al-Uzri told the team that he believed GOI provision 
of land could be expected.  He noted that it would be a 
complex issue to obtain low-cost funds from GOI sources to 
support TBI's contribution to the facility, but that 
obtaining financing from commercial sources might be possible 
for the TBI.  Bringing in another GOI entity to share risk 
might also be possible -- he suggested the Ministry of 
Construction and Housing's Iraq Housing Fund.  Assuming three 
regional pilot projects, Al-Uzri opined that finding a 
capable builder in the northern region wouldn't be 
problematic, noting that reputable Turkish companies were 
operating there, in some cases with their own financing.  He 
noted that security becomes an issue in the southern region 
requiring land parcels that are outside urban areas and fully 
securable, but that there are capable international companies 
operating in provinces such as Najaf and Karbala.  Ensuring 
security and finding reputable builders were a problem in the 
central part of Iraq. 
 
¶9. (SBU) Al-Uzri cautioned that the ownership structure of 
the implementing entity would be delicate, given the Iraqi 
prohibition against foreign ownership of land.  The entity 
would have to be legally Iraqi in personality.  Private bank 
participation in the financing would require incentives, 
perhaps including relaxation of the CBI's reserve 
requirements.  The cost of the mortgages would be an issue -- 
Al-Uzri agreed with Embassy Senior Advisor for Private Sector 
Development June Reed when she noted that, with a median 
government employee salary of $400/month, designing a 
mortgage of sufficient principal to build an acceptable home 
that can be repaid over 20 years with a monthly payment of 
one-third or less of salary ($133/month) would be a real 
challenge.  Al-Uzri said that many of these issues would have 
to be addressed as they arose in the implementation of the 
pilots -- "We will have to learn how to maneuver around the 
problems." 
 
¶10. (SBU) The OPIC team said that their next step would be to 
customize several OPIC "templates" used for construction 
financing agreements, including designs for primary and 
secondary mortgage facilities.  Key elements required in all 
such designs were specification of construction and labor 
 
BAGHDAD 00001493  003 OF 004 
 
 
standards, and protections for the borrowers and the lenders. 
 They committed to providing customized templates in the near 
future.  Last, the team made it very clear that OPIC would 
not be able to move forward with this partnership proposal if 
the TBI's financials were in any doubt, and urged Al-Uzri to 
issue the TBI's 2006 audit report immediately, and to finish 
the same for 2007 as soon as possible. 
 
MANY MINISTRIES WILL NEED 
TO BE INVOLVED 
-------------------------- 
 
¶11. (SBU) The OPIC team met with the Deputy Minister of 
Construction and Housing (MoCH), Mr. Istabraq I. Alshouk, and 
the ministry's Senior Engineer, Mr. Majeed, to discuss MoCH 
experiences in the provision of subsidized housing.  Alshouk 
expressed immediate readiness to agree in principal to the 
OPIC proposal, but noted that high-level concurrence and 
support from a number of other GOI authorities would be 
needed, including the Ministries of Finance and of 
Municipalities on questions of land; the CBI for questions 
related to the banking operations; the Ministry of Trade on 
the issue of company registration; the Ministry of Industry 
and Minerals on the provision of building materials; all 
other ministries whose employees might be the direct 
beneficiaries of the low-cost mortgages; and the Prime 
Minister himself.  He said it seemed feasible for the MoCH's 
Iraq Housing Fund to co-partner in the proposal, bringing 
with it its experience in making some 8,000 mortgages to 
ministry employees, with a commitment of $60 million in all 
provinces, with an average loan size of $20,000. 
 
JUST DO IT! 
------------ 
 
¶12. (SBU) Iraq's nominee for National Investment Commission 
(NIC) Chair, Ahmed Ridah, encouraged the OPIC team to move 
forward as quickly as possible with the mortgage facility 
proposal.  He readily admitted that his own lack of full 
legal authority to take decisions as the head of the NIC had 
not stopped him making representations domestically and 
internationally about the investment regime he felt Iraq 
needed.  He quickly listed a number of incentives he has 
declared the NIC would provide, including tax holidays, 
customs relief, one-stop shopping for business and investment 
registration -- none of which has any legal force.  When the 
team brought up the need for the July 2005 U.S.-Iraq 
Investment Incentive Agreement to be ratified in the Council 
of Representatives in order to formalize OPIC's operations in 
Iraq, Ridah advised the team to press full steam ahead, 
regardless of legal standing.  "Just do it -- that's what I'm 
doing!" 
 
COMMENT: 
THEY WILL COME -- 
BUT CAN IT BE BUILT? 
--------------------- 
 
¶13. (SBU) The OPIC team's meetings were useful in generating 
interest across several GOI ministries in a pilot program for 
a dollar-denominated mortgage facility benefiting low- and 
moderate-income borrowers, while at the same time revealing a 
number of challenges to be addressed in designing and 
implementing such a program.  A first-order question has to 
be: Can an acceptable house be built at a price a 
moderate-income borrower can pay if the GOI assists with 
subsidies on both land and construction cost? 
 
¶14. (SBU) As always in economics, with enough assumptions 
anything is possible.  We start our back-of-the-envelope 
figures with the realistic parameters of free land from the 
GOI; a 20-year mortgage at 10% interest; and a 
moderate-income borrower with a monthly income of $600.  We 
ask that borrower to come up with a 20% down payment.  We 
also ask that the borrower commit 50% of income to the 
mortgage payment (higher than OPIC's preferred optimum of 
30%).  That payment of $300/month can service a mortgage of 
around $31,000; adding the 20% down payment, the construction 
cost would be about $39,000. 
 
¶15. (SBU) This will not buy the kind of home that OPIC, the 
GOI, and the Iraqi people seek.  A modest version of that 
house has a construction cost of at least $50,000.  Either 
the borrower must come up with a larger down payment, or the 
GOI must subsidize at a rate of some $11,000 per unit.  A 
 
BAGHDAD 00001493  004 OF 004 
 
 
more typical construction cost for a "New Home for the New 
Iraq"  would be upwards of $75,000 -- either the per-unit 
subsidy must climb, or the borrower's down payment goes up -- 
the second being the less realistic assumption of the two. 
The scenario based on a construction cost of $39,000 was 
already weak, assuming as it did that the borrower has an 
income of $600/month; can find $8,000 for a down payment; and 
pay 50% of income for a mortgage.  Make that income $400, and 
the payment 30% of income, with no down payment, and the 
maximum mortgage amount looks like $13,000.  Would the GOI 
provide a $27,000 - $37,000 per unit subsidy?  There is a 
clear consensus among not only analysts, but most GOI 
ministries, that a major effort is required -- but even with 
the subtraction of the cost of land, this is going to be very 
difficult. 
 
¶16. (SBU) Then there will be the need to engage across a much 
wider range of ministries to generate specific support in 
terms of the provision of land, participation of employees, 
supply of materials, as well as agreement to OPIC-required 
standards for construction, labor, materials, borrower and 
lender protection, etc.  The CBI will need to be brought on 
board to ensure that the banking operations either fit within 
current prudential regulations or that these are modified -- 
all the while answering difficult questions about lending in 
dollars in contradiction to current monetary policy 
objectives.  Issues of the TBI's still un-documented 
financial audits for 2006 and 2007 remain to be resolved; 
and, the NIC chairman-nominee's exhortation notwithstanding, 
OPIC's ability to maintain operations in Iraq in the absence 
of a ratified bilateral investment incentive agreement must 
be addressed.  That said, the need for housing is critical 
and can only be addressed if the GOI participates in a 
variety of ways, including extensive financial support to 
ensure that low- and modest-income Iraqis can obtain adequate 
shelter sooner rather than later.  OPIC's proposal may 
provide the impetus for the GOI and private sector to start 
down the long road toward a market-based housing sector.  END 
COMMENT. 
CROCKER