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Viewing cable 08BAGHDAD3924, JURASSIC PARK ON THE TIGRIS: SAVING BAGHDAD'S

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Reference ID Created Released Classification Origin
08BAGHDAD3924 2008-12-15 12:48 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Baghdad
VZCZCXRO6373
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3924/01 3501248
ZNR UUUUU ZZH
P 151248Z DEC 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 0868
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEKJCS/DIA WASHDC PRIORITY
UNCLAS SECTION 01 OF 03 BAGHDAD 003924 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EIND EINV ECON IZ
SUBJECT: JURASSIC PARK ON THE TIGRIS: SAVING BAGHDAD'S 
ECONOMY FROM INDUSTRIAL DINOSAURS 
 
This is a Baghdad EPRT-2 reporting cable. 
 
1. Summary: The Baghdad economy depends heavily on 
state-owned enterprises (SOEs), but these dinosaurs have 
uncertain prospects in Iraq,s nascent free-market economy. 
Poor leadership and daunting capital needs are their biggest 
challenges.  We need to have realistic expectations for the 
restructuring and privatization of SOEs in Baghdad.  While 
there is no hope for some, we must remain engaged with others 
to capitalize on opportunities for both short-term 
counterinsurgency gains and longer term economic development. 
 End summary. 
 
SOEs Still Dominate the Economy 
------------------------------- 
 
2. (SBU) Outside of the public service, SOEs are the largest 
employers in the eastern Baghdad districts of Rusafa, Karada, 
and 9 Nissan -- EPRT-2,s area of operations (AO).  Over 77 
SOEs employ an estimated 40,000 people making a wide range of 
products -- paints, foods, plastic items, electrical 
appliances, bottled drinks, construction materials, cooking 
oil, agricultural supplies, leather goods and apparel. 
Almost all medium and heavy industry in the AO is 
state-owned.  Over the past 18 months, EPRT-2 has visited 
many of these SOEs and implemented projects with several of 
them, trying to stimulate productivity and increase 
employment.  The results have been mixed.  SOEs in Baghdad 
face two main challenges: people and capital.  Because these 
SOEs employ so many people, their progress will have an 
important effect on both the local economy in Baghdad and on 
its security. 
 
Dinosaurs in a Tarpit 
--------------------- 
 
3. (SBU) Iraq's changing economy worries SOE managers in 
Baghdad.  Many hope the future will be like the past; they 
are content to wait for the GOI to ride to the rescue and 
revive the pre-2003 command economy.  The director general 
(DG) of National Chemical and Plastics Industries (NCPI) 
recently admitted, "The employees and I are looking at the 
Saddam days as the glory days.  The old regime used to 
support domestic production."  Other DGs are quick to suggest 
that Coalition Forces should support their SOEs.  Failing 
that, they hope the GOI will "take care of us."  Many 
managers are demoralized and even emotionally overwhelmed by 
the jolting economic changes of the past few years.  They 
frequently look for scapegoats, with Iranian and Chinese 
imports at the top of the list.  The technical director at 
NCPI, for example, reasoned that because imports were being 
sold cheaper than his inputs, there was "a conspiracy to 
destroy Iraqi industry." 
 
4. (SBU) Some SOE managers in the EPRT-2 AO are open to 
change and motivated to adapt to the new rules of competitive 
business and management practices.  Frequently, however, they 
do not have the skills or mindset the free market demands. 
We visited two SOEs to inquire about their participation in a 
Ministry of Industry and Minerals (MIM) program to fund 
turn-around plans for SOEs.  We were handed two "business 
plans" that were essentially bills of quantity and pricing 
for production equipment with no strategic, financial or 
sales plans attached.  The managers were simply looking to 
restart production, unaware of the need for training or 
strategic management. 
 
5. (SBU) Managers skilled in sales and marketing are 
especially rare.  NCPI,s DG, for example, responded to a 
question about the role of his sales force by saying, "We 
Qquestion about the role of his sales force by saying, "We 
have a sales force, but no one calls them anymore."  The DG 
of Modern Paints Industries (MPI), which is partially 
state-owned, told us his new "marketing strategy" was to try 
to get city building codes changed to require the use of his 
company,s paint. 
 
6. (SBU) Even when a manager has the will and the skills to 
succeed, GOI interference can keep SOE dinosaurs trapped in 
the tarpit.  The DG of the State Company for Vegetable Oils 
(SCVO), an SOE in Baghdad's Karada neighborhood, told us in 
August that MIM had ordered SOEs to increase workers' 
salaries by 80 percent and return idle workers to full-time 
status.  (Note: Most SOEs have many "employees" who get paid 
but do not regularly come to work.  End note.)  The directive 
 
BAGHDAD 00003924  002 OF 003 
 
 
forced SCVO to bring over 2,000 workers back, even though the 
company,s production lines were stalled because of an 
overstock of product.  These constricting mandates do not 
allow managers to make crucial decisions to cut overhead and 
make the companies profitable.  Furthermore, the Ministry 
also limits the ability of managers to perform crucial 
functions such as issue debt, raise capital, purchase or sell 
property, and negotiate the terms of joint ventures. 
 
Capital Infrastructure Outdated, Investment Needs Large 
--------------------------------------------- ---------- 
 
7. (SBU) Lack of modern equipment is the second huge obstacle 
standing between SOEs and increased production capacity. 
Because of Iraq,s wars and the UN embargo, almost all 
capital infrastructure is at least 20 years old.  Even if 
equipment has not been looted or stolen, it is generally  in 
poor repair and woefully out of date.  Much equipment was 
manufactured in East Germany or the Soviet Union and often 
the manufacturer no longer exists, making it impossible to 
find parts to resurrect production lines.  Ingenious 
engineers must improvise replacement parts to keep such 
equipment operating despite rampant cannibalization. 
 
8. (SBU) Working capital is non-existent in many companies in 
Baghdad.  This is especially hard on SOEs that have to manage 
long, dysfunctional supply chains.  SCVO, for example, must 
import its feedstock of vegetable oils from as far away as 
Malaysia and Brazil.  Transactions to procure the oil require 
navigation through a labyrinth of personnel at various 
ministries.  After the bureaucrats approve a purchase, an SOE 
bank must coordinate the transfer.  This system exacerbates 
the shortage of working capital. 
 
9. (SBU) Investment needs among SOEs in EPRT-2's AO are 
large, ranging up to $100 million.  For now, SOEs cannot move 
forward unless the state or large investors provide capital 
for equipment and operations.  While MIM has begun 
implementing a limited program to supply capital to SOEs, the 
effort is limited by the enterprises, management capability 
and the funds available to each company.  The DG of MPI told 
us in October that MIM had recently set aside $85 million for 
the mixed sector.  Loans would be interest-free for two years 
and cost four percent after that.  The DG of NCPI reported in 
October that loans would be at six percent for five years. 
MPI and NCPI have been allocated $4 million and $7 million 
for their investment projects.  It was not clear to either DG 
how these decisions were made. 
 
10. (SBU) Poor security strictly limits prospects for 
international investment in Iraq's SOEs.  Further obstacles 
to investment are inadequate banking and investment laws, and 
the complicated management structure imposed by GOI 
ownership.  DGs report that while MIM has encouraged them to 
court foreign joint ventures, the Ministry has provided no 
support or guidance.  Meanwhile, the private Iraqi investors 
in mixed enterprises are waiting for the GOI to show 
leadership.  One DG told us that his private shareholders 
were interested in investing more in the company, but were 
holding off to see what resources the GOI would give to the 
companies and what the GOI planned to do with its shares. 
 
Comment 
------- 
 
11. (SBU) While there is a strong free-market argument to 
letting SOE dinosaurs in Baghdad fail, this could undermine 
Qletting SOE dinosaurs in Baghdad fail, this could undermine 
our counter-insurgency strategy.  Keeping SOE employees on 
the payroll reduces incentives to join an insurgency or turn 
to criminal groups for sustenance.  To the extent that 
insurgent activity is economically driven, letting SOEs fail 
poses the risk of turning up to 40,000 bread-winners into the 
streets of East Baghdad, and potentially reversing the 
hard-won security gains of the past year. 
 
12. (SBU) Thus, despite the dismal long-term economic outlook 
for most SOEs, security concerns argue for continued 
engagement with them to avoid a large economic disruption at 
this critical time.  Neither EPRT-2 nor the U.S. military has 
the resources or capacity to facilitate wholesale turnarounds 
for these companies.  Thus our primary focus will remain on 
propping them up over the short term.  Helping NCPI, for 
example, make sub-contracting arrangements with USG 
contractors keeps workers and equipment active and buys time 
for the managers and the GOI to develop a transition plan. 
 
BAGHDAD 00003924  003 OF 003 
 
 
 
13. (SBU) A few companies have the potential to make the 
transition.  With MPI, the EPRT piloted a management-training 
program earlier in the fall designed to transform the sales 
and marketing team from an order-taking organization to a 
streamlined sales force.  Initial results have been hopeful 
though the real effect will only be visible later. 
14.  Finally, working with SOEs provides opportunities to 
educate on a broader scale and to teach modern management 
skills to Iraqis who may be in the workforce for decades to 
come.  Although a USAID-funded Small Business Development 
Center offers courses in basic management skills in the 
EPRT-2 AO, little is available for the middle or upper 
manager of a larger enterprise.  The effort may not 
ultimately reverse any particular company, but it can improve 
the management skills of a large group of mid-level managers. 
 These skills will be important no matter where they are 
applied to rebuild Iraq,s economy. 
CROCKER