VZCZCXRO2352
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2063/01 2130848
ZNR UUUUU ZZH
R 010848Z AUG 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4152
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 002063 
 
SIPDIS 
 
SENSITIVE 
 
TAGS: ECONEINVEFINPGOVIZ
SUBJECT: IRAQI CAPITAL AT WORK: PEPSI INTERNATIONAL AND THE BAGHDAD 
SOFTDRINK COMPANY 
 
SUMMARY: 
¶1. (SBU) SUMMARY: An Iraqi investment bank's takeover of the 
mixed-owned enterprise (MOE) Baghdad Softdrink Company could be a 
model for moving the stagnating MOE sector forward.  Since gaining a 
controlling stake of Baghdad Softdrink, the bankers have brought in 
capital and management expertise to resolve quality and labor 
issues.  Over a year old, the venture has successfully increased 
employment, tripled the company's production, and brought $250 
million of investment to East Baghdad. END SUMMARY 
 
DRINKING FROM THE TIGRIS 
------------------------ 
¶2. (U) Baghdad Softdrink was founded in 1950 and became an official 
Pepsi franchise in 1984, covering the middle of Iraq.  Located in 
the Zafaraneeya Industrial Park in East Baghdad amidst a cluster of 
large (1,000- 5,000 employees) mixed-owned enterprises, it suffered 
declines in productivity, capacity, and quality experienced by other 
MOEs in recent years.  The Company employs about 1,200 workers, not 
including auxiliary services such as drivers and agents is traded on 
the Iraqi Stock Exchange.  It is 51 percent state-owned. 
 
¶3. (U) Shortly after the liberation of Baghdad, Pepsi International 
resumed ties with Baghdad Softdrink and provided management and 
production training from Pepsi's Beirut offices.  Utilizing fellow 
Arabic speakers with post-conflict experience, Pepsi made a 
concerted effort effort to bring the company up to international 
standards.  In addition, Pepsi International loaned Baghdad 
Softdrink approximately $30 million to overhaul the plant and 
restart operations.  Despite this assistance, production, quality, 
and profit remained flat. 
 
 
BANKERS TAKE THE PEPSI CHALLENGE 
------------------------ 
 
¶4. (SBU) In late 2007, Baghdad Softdrink approached Al-Bilad Islamic 
Bank, owned by the Al-Hassaney family, for help servicing the loans 
from Pepsi.  Harith Yahya, a family member and managing director of 
an Al-Bilad subsidiary, proposed a debt-for-equity mechanism and by 
March of 2008, Al Bilad had purchased a controlling 40 percent stake 
of the company, reducing the GOI share to 14 percent.  The bankers 
immediately made radical changes to the company's operations, 
installing new management software, QA/QC procedures, and a 
finger-print ID system for workers.  According to Harith, production 
over the last year has tripled to approximately 3 million cans per 
day, and the market value of the company is up 30 percent.  Hundreds 
of new trucks began bringing raw materials and finished product in 
and out of the nearly idle Zafaraneeya Industrial Park.  Notably, 
Pepsi International recently fully certified Baghdad Softdrink for 
meeting all of the company's quality standards. 
 
LABOR TROUBLES BUBBLE UP . . . AND FLATTEN OUT. 
------------------------ 
 
¶5. (U) The bankers immediately ran into challenges with their labor 
force.  Harith explained that the workforce lacked training and 
"mentality."  The new management instituted a "performance based" 
bonus system and demanded workers show up for work.  Within days of 
taking the helm, Harith found himself locked in the executive 
suites, trapped by 750 workers protesting the changes in management. 
 Al-Bilad installed a private security company and threatened to 
shut down production unless the union ceased disrupting work.  A 
year later, Harith reports that attendance is up to "100 percent," 
the company has begun hiring new drivers and laborers, and with the 
new performance package, workers are getting paid "double their 
previous salaries." 
 
REFRESHING INVESTMENT 
------------------------ 
¶6. (U) In the spring of 2009, Al Bilad broke ground for an ambitious 
Q6. (U) In the spring of 2009, Al Bilad broke ground for an ambitious 
expansion of operations to support Baghdad Softdrink operations. 
The bank is investing approximately $250 million in greenfield 
facilities along the Zafaraneeya Industrial Park for facilities 
that will bottle water under the Aquafina brand, produce the 
currently imported aluminum cans and glass bottles used by the 
company, and recycle Baghdad's municipal waste paper into cardboard 
packaging for their products.  The combined facilities, to be 
completed by the end of 2009, will employ 1,500 new direct hires. 
According to Harith, "It will be the largest bottling operation in 
the Middle East" by the end of 2009. 
 
UNREQUITED WOO 
-------------- 
¶7. (SBU) Al-Bilad has taken interest in other companies in the 
Industrial Park.  In May of 2009, the bank took an undisclosed 
position in the MOE Electronic Industries Company (EIC).  With EIC, 
Al-Bilad is following the Baghdad Softdrink model, providing 
expertise and taking a position on the Board of Directors.  While 
Harith has examined deals with other MOE's in the industrial park, 
the bank deemed the deals too risky "because of the GOI's 
controlling ownership."  Despite this, the bankers continue to look 
 
BAGHDAD 00002063  002 OF 002 
 
 
for opportunities in the mixed sector. 
 
COMMENTS 
-------- 
¶8. (SBU) Iraqi Investment banks, bringing capital and management 
experience, offer the possibility of investment, employment, and 
productivity to the stagnating MOE sector.  Banks are capable and 
willing to rehabilitate these companies, clearly seeing a potential 
for profit.  With the improved security situation in East Baghdad, 
EPRT has seen an increased activity and interest from serious 
investors.  Indeed, Harith himself said that the deciding factor was 
"the incredible turnaround in security in the area provided by CF 
and ISF over the past year."  In the majority of these enterprises, 
the GOI continues to hold over 51 percent ownership.  Until the GOI 
begins to cede its stranglehold of control on the mixed sector, and 
its state owned enterprises as a whole, it will likely continue to 
lose jobs and opportunities for the Iraqi economy.  Sadly, the case 
of Baghad Softdrinks and Al-Bilad might become the exception. 
 
FORD