VZCZCXRO0343
RR RUEHBC RUEHDA RUEHDE RUEHKUK
DE RUEHIHL #0096/01 3421326
ZNR UUUUU ZZH
R 071326Z DEC 08
FM REO HILLAH
TO RUEHC/SECSTATE WASHDC 1128
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEHIHL/REO HILLAH 1201

UNCLAS SECTION 01 OF 03 HILLAH 000096 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ELAB IZ
SUBJECT: BABIL'S INDUSTRY:  PRIVATE SECTOR GUARDEDLY OPTIMISTIC, SOE 
FUTURE UNCERTAIN 
 
REF: HILLAH 92 
 
HILLAH 00000096  001.2 OF 003 
 
 
¶1. (U) Summary:  Babil's private sector manufacturers struggle 
with access to reliable power and credit, but say their sector 
is improving, especially for companies making construction 
materials.  SOEs employ over 30,000 workers in the province, but 
most only show up to collect paychecks.  SOEs have focused on 
creating jobs, not profits, and face an uncertain future. 
 
A Questionable Future 
--------------------- 
¶2. (U) Babil's manufacturing industry presents a patchwork of 
small struggling private sector factories with about 10,000 
workers and large non-functional State-Owned Enterprises (SOEs) 
with over 30,000 employees.  According to official statistics 
industry generates 14 percent of provincial GDP.  Salah Hassan 
Bahaya, Director of the Babil Center for Business Community 
Development thinks the figure might be a few points higher since 
the recent building boom (reftel) has generated an increased 
need for locally-produced construction materials.  Still, in 
conversations with dozens of public and private sector business 
actors all unanimously expressed concern about the future of 
Babil's industry. 
 
Private Sector Optimistic Despite Infrastructure Credit Concerns 
--------------------------------------------- ------------------- 
¶3. (U) According to Bahaya there are about 200 medium and large 
private sector factories in Babil concentrated in 
food-processing and manufacturing construction supplies.  The 
average plant has 10-20 workers but some employ hundreds.  In 
addition, there are close 5,000-7,000 craftsmen working in small 
1-3 person shops mainly producing metal and wood products. 
Productivity and quality are generally low, and competition with 
imports is a problem.  Nonetheless, in a recent survey of 
Babil's private sector manufacturers the majority said the 
sector was improving.  Companies supplying the construction 
industry with bricks, cement, and wood-products are doing 
particularly well. 
 
¶4. (U) The survey pointed to two significant problems: lack of 
reliable electricity and difficulty in obtaining credit. 
Electricity has been gradually improving over the past year, and 
the Provincial Council Energy Committee member Hassan Hamza has 
predicted that the installation of new generating units and 
transformers will lead to significant improvements in 
electricity by mid-2009. 
 
¶5. (SBU) The root of the credit problem is that fact that banks 
make more depositing money with the Central Bank than by making 
business loans, according to Layla Adnan Yehia, regional manager 
for the Bank of Baghdad.  Yehia told Econoff that her bank makes 
a small number of business loans, usually at rates between 10-12 
percent, but only when it believes the borrower, or their family 
and associates, will ultimately deposit more money than they 
borrow: money that the bank can then put in the Central Bank. 
 
¶6. (SBU) Improved regulatory regimes can create new private 
sector niches.  Al-Wind Pharmaceutical, a major South-Central 
medicine importer-distributor for 40 years, wants to develop a 
manufacturing plant in Al-Hillah.  CEO Murthda Bahya explained 
to Econoff that as the GOI began regulating the quality of 
imported medicine, which constitutes 90 percent of medicine sold 
in Iraq, the price skyrocketed -- in some cases tripling.  The 
PRT worked with Bahya to develop a business plan and find a 
foreign pharmaceutical company for a license agreement to 
manufacture medicine.  Al-Wind has now begun a USD 3.5 million 
project to produce intravenous solution and distilled water -- 
using its own funds -- that will employ close to a hundred 
skilled workers.  Still, plans to build a drug manufacturing 
plant are on hold while the company tries to obtain a USD 4.5 
million loan. 
 
The SOE Production Problem 
-------------------------- 
¶7. (SBU) Babil's 20 SOEs are intended to create jobs -- not 
profits -- and were never competitive, according to Dr. Mejbel 
Rafia Merjan, Dean of the Economic Department of the University 
of Babil.  They produce cement, bricks, textiles, automobiles, 
machinery and chemicals under the auspices of the Ministries of 
Industry, Trade, and Agriculture.  Provincial SOEs range from a 
few hundred employees to almost 6,000 employees on huge 
facilities covering dozens of acres.  Still, on any given day 
less than 10-20 percent of employees can actually be found 
working. 
 
¶8. (SBU) Because the GOI funds SOEs they do not need to make a 
profit.  This means the input cost of SOE-produced goods often 
outweighs the price they are sold for.  Jabar Lool, 
Director-General of Al-Furat Chemical SOE, gave EconOff an 
example: woven plastic bags cost Al-Furat over 1,000 ID to 
produce, but can only be sold for 500-600 ID.  Increased 
production is therefore not a metric of industrial success, and 
 
HILLAH 00000096  002.2 OF 003 
 
 
can actually mean an SOE is losing more money. 
 
All Warp But No Weft 
-------------------- 
¶9. (SBU) Lack of market incentive means SOEs have little reason 
to plan.  When asked why Al-Furat's dozens of weaving machines 
lay inactive, Lool explained that while they had materials to 
weave warp lines, they had been out of materials for weft lines 
for the past six months.  An executive at the Al-Hillah textile 
factory said the general practice was to wait until they ran out 
of raw materials before trying to find the resources to purchase 
more.  Delays in obtaining supplies can be compounded by the 
fact that many raw materials come from other SOEs: so there may 
be a long wait even once money for a purchase has been located. 
 
¶10. (SBU) SOEs have a reduced incentive to sell products.  A 
nearby garment SOE spent USD 1.5 million buying materials to 
make 12,000 business suits more than a year ago.  Yet a visit to 
the factory reveals over 90 percent of finished suits stored in 
a warehouse: management would not lower prices to a market 
competitive level because they said it did not matter when they 
sold them.   Even if SOEs do sell their product, market issues 
may be largely irrelevant as the GOI or another SOE is often the 
customer.  Lool does not have to worry too much about being 
competitive in the market because he knows that, at least for 
now, he sells most of his plastic bags to other SOEs. 
 
SOEs:  A Looming Social Catastrophe ? 
------------------------------------- 
¶11. (SBU) Even though the majority of SOE employees rarely show 
up for work they still expect to get paid: earlier this year 
when the GOI temporarily froze salary raises that SOE employees 
had been promised, they demonstrated in the streets for days 
until being assured that they would receive their raises at the 
beginning of the year.  Provincial Council Planning Committee 
Chairman Quesay Nadi Ali Hummadi called SOEs a looming social 
catastrophe.  He told Econoff that SOEs showed that Iraq's 
economic evolution had not kept pace with its democratic 
transformation.  He worried that if the GOI phases-out SOEs, 
either by shutting them down or privatizing them, without 
adequate plans for workers, then it could lead to significant 
social disruption. 
 
¶12. (SBU) Sabah Al-Khafaji, Director-General of a 5,800 person 
SOE and chairman of the local Nahia council in Iskandria, 
discussed the possibility of an SOE phase-out.  He told us that 
when he wears his DG hat he does worry about a phase-out, but 
when he puts on his politician hat, and reflects on the 
political problems a phase-out could create particularly with 
upcoming elections, then he thinks it is highly unlikely that 
the GOI will phase-out SOEs in the foreseeable future.  Still, 
Al-Khafaji said he plans to focus USD 30 million the GOI 
recently promised his SOE to improve profitability and 
sustainable employment. 
 
 
Helping Stand-Up SOEs: A Litmus Test 
------------------------------------ 
¶13. (SBU) SOE management recognizes that their companies are not 
currently economically sustainable and require continued 
government subsidies.  They have told us they understand their 
SOEs need to become more competitive by: breaking monolithic 
SOEs into separate independent units with their own management 
and fiscal control, creating products that meet market demand, 
increasing manufacturing efficiency with technology upgrades, 
and enhancing worker productivity through training and 
incentives.  The PRT has worked with five local SOEs that 
collectively employ 20,000 workers. 
 
¶14. (U) Creation of an independent 425-person Velvet Production 
unit within the 3,800 strong Al-Hillah Textile SOE represents a 
litmus test.  The PRT has worked Al-Hillah Textile management to 
try to develop a profitable factory-within-a-factory. 
Management chose to make velvet because it builds on existing 
fabric design and production expertise and because there is 
strong local demand for velvet for upholstery, drapes and 
women's clothing. 
 
¶15. (U) The new unit purchased state-of-the-art Belgium velvet 
weaving machines and sent teams to Belgium for training sessions 
using USD 3.6 million from the GOI (including a USD 1.8 million 
bank loan against a MIM guarantee) and USD 3 million from the 
task force to improve Business and Stability Operations (BSO). 
The PRT organized a three-day class for management covering 
basic management principles.  If the unit, scheduled to begin 
production in January 2009, turns a profit, then workers will 
receive bonuses.  Management hopes that if the unit turns a 
profit it will set an example that other units in the SOE will 
emulate, particularly once unit workers begin receiving bonuses. 
 
 
 
HILLAH 00000096  003.2 OF 003 
 
 
 
¶16. (SBU) Comment:  While the power outlook is improving, access 
to credit remains a problem.  We plan to work with the Tijara 
USAID programs for small-medium business credit and microcredit 
to develop innovative ways to facilitate loans, possibly by 
helping cover the interest spread between what borrowers can pay 
and what banks will accept --  an idea Yehia is eager to 
explore.  Still, SOEs remain the figurative elephant in the 
room, and unless some way to make them sustainable is found, 
they may soon face extinction.  The future of the Velvet 
Production unit represents a test case: if the combined efforts 
of the GOI, USG, plant management and PRT are not able to make 
it economically viable, then it is difficult to figure out how 
most SOEs will ever turn a profit. 
HILLAS