Problems Reforming Iraq’s State Owned Enterprises

All to often, what the Iraqi government says, and what it does are two different things. A perfect example of that is Baghdad’s handling of the state owned enterprises (SOEs). While some changes have been brought about in the last few years, the majority of the almost 200 government run businesses are not only continuing to operate, but have been strengthened and protected by the authorities. The talk of reform has largely been ignored, because politicians use the SOEs to maintain employment, while officials want to maintain their hold on the economy. The stated goal of the Iraqi government is to build a market economy, but its handling of the SOEs shows that all too many are sill wedded to a state-run system.

State-owned enterprises continue to play a large role in the Iraqi economy. There are a reported 192 SOEs. The Agriculture Ministry for example runs SOEs that make fertilizer and farming chemicals. The cabinet has issued orders that SOEs should deal with SOEs first before contacting private companies to maintain their influence over certain industries. That has led to 75% of the contracts made by the Oil Ministry to be with SOEs. State-run banks dominate the financial sector. Private banks for instance, are excluded from working with the public sector. SOEs receive large subsidies such as not having to pay rent, and control large tracts of land and other assets. 66% of the country’s farmland is under SOE control. Finally, the SOEs receive a huge amount of money from the state to keep them running. In 2007 the government spent 1.5% of the GDP on SOEs. That went up to 2.8% in 2008, 4.2% in 2009, before dropping to 3% in 2010. In 2012, they were ready to get around $3 billion. Much of this is wasted money, because the SOEs are out of date, using old equipment, are overstaffed, and are non-competitive. More importantly, they maintain the government sector in the economy when the National Development Plan calls for encouraging private enterprise. While Baghdad has continuously announced plans to reform the SOEs they have not been able to follow through with many of them.

The push to modernize the SOEs began with the Americans, and has continued with the Iraqi governments that have taken power since 2005. The Coalition Provisional Authority (CPA) originally wanted to privatize the SOEs in 2003. Faced with the growing insurgency and instability the CPA changed course, and wanted to reform the SOEs, while maintaining employment. That has been the general plan of the U.S. since then. The Defense Department had a task force to help transition the SOEs to modern practices, and attract foreign investment. That job was then taken over by the U.S. Embassy. The Iraqi government has followed a similar path with the cabinet approving various plans. The latest was in early 2011 called the Roadmap for Restructuring SOEs, which was to place them into three categories. The first were those that could attract foreign investment in joint ventures. The outside firms were supposed to modernize the SOEs’ practices and management, so that they could become competitive. The second were companies that still needed government support until they were ready for joint ventures. The third were the ones that were losing money. They were supposed to get their older workers to retire, and the other ones to move onto other jobs to try to improve their finances. The problem is these plans have made little progress. The reforms are supposed to be implemented by the Prime Minister’s Task Force for Economic Reform for instance, but it has no permanent staff, and deals with a whole range of issues, so the proposed changes don’t get the attention they need. The government has also started efforts to re-capitalize the companies and protectionist polices to maintain them rather than reform them. The main problem the Americans and Iraqi officials have run into in their attempts to change the SOEs is the lack of political will.

Neither Iraqi politicians nor bureaucrats really want to change the SOEs. The political class for example wants to mollify the public and their followers by giving them jobs. Iraqi officials want to maintain their control over the economy. The SOEs accomplish both these tasks. There are around 600,000 employees at the SOEs, an estimated 60% of which are unneeded. Not only that, but many of them are low to semi-skilled. They are able to maintain their jobs, because politicians use the SOEs, ministries, and other government offices as a social safety net to keep people employed, and off the streets. Political parties also dole out these jobs in patronage networks in return for votes. Finally, the various ministries that run the SOEs are used to controlling jobs and markets, because Iraq has had a state-run economy for decades. Rather than change that system, many have attempted to set up monopolies over certain industries with the SOEs. Modernizing the companies would require firing thousands of workers, and opening up certain fields to competition. Neither the political parties nor the bureaucrats want to see that happen. They therefore are aligned with each other to prevent any major changes to the SOEs. That’s why plan after plan has made little headway.

The state-run enterprises have become a political tool in today’s Iraq. Politicians and government officials use them to control the public and economy. At the same time, they are a drag upon the budget, and hurt the development of the economy. Almost all of them lose money; money that could be better spent on diversifying Iraq away from being an oil dependent country. Instead, short-term political calculations over jobs and power have dominated decision-making. Until there is a real urge amongst the Iraqi leadership to change, the SOEs will continue to operate as they are, and ensure the state a leading role in the economy.

SOURCES

Karim, Mohammad, “Tendency to launch the plan for reforming the public sector companies,” Radio Free Iraq, 5/20/12

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/12

- “Quarterly Report to the United States Congress,” 4/30/11

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12