R 150825Z MAY 09
FM REO HILLAH
TO SECSTATE WASHDC 1189
INFO IRAQ COLLECTIVE
REO HILLAH 1262

UNCLAS HILLAH 000038 
 
 
E.O. 12958: N/A 
TAGS: ECON EIND PGOV IZ
SUBJECT: ZOMBIE FIRMS HAUNT IRAQ'S ECONOMY 
 
REF: 08 HILLAH 92, HILLAH 35 
 
 
¶1. Summary: Many of Iraq's state-owned enterprises (SOEs) are 
economic zombies -- the GOI won't let them die, and they do not 
have the means to become viable on their own.  At a chemical and 
sack plant in Babil Province, for instance, less than half the 
employees actually work, but the Ministry of Industry and 
Minerals (MIM) still funds the entire bloated payroll. 
Meanwhile, managers remain bound by MIM rules that increase 
costs, pushing the operation even further from profitability. 
While MIM is reportedly ready to finance new machinery, 
investment alone is not enough, for its main customers are other 
SOEs with uncertain futures.  End summary. 
 
 
Bird Watching at the Sack Factory 
--------------------------------- 
 
¶2. Jabbar Lool is the Director General of the Al Furatt Company 
(www.furattco.com) in Sadat al Hindiya, a town on the Euphrates 
about 50 miles south of Baghdad.  Jabbar's company makes 
industrial chemicals, corn starch, and woven plastic sacks for 
fertilizer, grain and cement.  About 600 of just over 2,000 Al 
Furatt employees work at the sack factory -- that is, they are 
paid to make sacks, but no more than 200 work on a typical day. 
While the theoretical production is 10 million sacks a year, the 
current output is just a fraction of that.  On a tour of the 
sack factory on April 26, only about 50 workers were visible on 
the shop floor, where five of the seven production lines had 
been idle for years.  In some corners of the factory, birds 
flitted between silent ranks of dilapidated machines. 
 
¶3. Every sack Jabbar produces goes to the North Fertilizer 
Company, another SOE.  That happens by order of the MIM, not the 
market.  The sacks from Babil are 40-percent more expensive than 
the ones MIM imports from Syria.  Jabbar reckons that labor 
accounts for about half of a sack's production cost.  Based on 
other data Jabbar gave the PRT, total average cost is well over 
a dollar per sack.  MIM pays Jabbar about 50 cents per sack. 
 
 
A Faith-Based Business Plan 
--------------------------- 
 
¶4. To be competitive, Jabbar must bring his costs down.  That 
requires a multi-million dollar investment in modern equipment. 
Jabbar and his production managers think that with at least USD 
12 million dollars for new machines, the factory can bring unit 
cost down to 48 cents and achieve an average annual rate of 
return just over 20 percent.  MIM has reportedly promised 
several million for new equipment, and the Task Force to Improve 
Business Stability Operations is ready to chip in USD 1.5 
million of equipment. 
 
¶5. But that may not be enough to give the sack factory a future. 
 Even with financing in hand, Jabbar may not procure his own 
equipment.  That has to be arranged through MIM, a 
time-consuming process, and time is money for SOEs just as for 
any other business.  And with factory workers technically 
designated as civil service employees, their life-time 
employment is guaranteed.  These and other bureaucratic 
restrictions leave Jabbar with practically no means of effecting 
a turn-around. 
 
¶6. MIM says subsidies for SOEs will end in 2011.  The GOI's 
determination to follow through on that policy is open to 
question, but the prospect is nevertheless daunting for the Al 
Furratt Company.  Jabbar's projections of profitability after a 
capital injection are based on the assumption that he can carry 
on selling sacks to other SOEs.  But if other SOEs lose their 
subsidies too, Jabbar's business plan starts to look more like 
wishful thinking. 
 
 
Comment 
------- 
 
¶7. Al Furatt, like other SOEs (reftels) is an economic zombie -- 
the GOI will not let it die but it does not have the means to 
become viable on its own.  Even with substantial injections of 
capital, SOEs remain massively overburdened with excessive 
employees making it difficult to project a glide-path to 
privatization.  Some SOE managers have told us they hope to 
jettison up to two-thirds of their workers through golden 
parachute retirements in the next two to four years.  Still, 
managers remain concerned that political exigencies may mean 
that for every worker gone, one steps in to take their place. 
 
 
HILLASK