Friday, April 9, 2010

Iraq Tries To Invite Foreign Investment In Its State-Run Industries, Again

At the end of March 2010 the Iraqi Ministry of Industry said that it was putting up 240 state-run companies for joint ventures with foreign companies. The Iraqi factories include everything from construction, petrochemicals, cement, food, and textiles, and the investors can have up to 50% ownership. The problem is the Ministry of Industry has been trying to get corporations to invest in these government factories for the last two years with little success, because most are underperforming, badly managed, and are losing money.

The Iraqi government first launched an investment plan into state-run industries in 2008. Then the Ministry of Industry offered up around 40 companies for joint ventures. Only eleven got any interest, and few of those deals were finalized. In 2009, it said it was putting up 240 factories that were part of 67 state-run businesses for foreign companies to bid on, the same ones that are now  being discussed. The Ministry wanted to start the process by the end of the year, but the world recession killed the plan.

Iraq’s state-run businesses have been in steady decline since the 1980s. Wars and sanctions in the 1980s and 1990s deprived them of money, investment, maintenance, and innovation. Most were inefficient and money losers, but were kept open by Saddam Hussein to keep people employed. Then after the U.S. invasion, the Coalition Provisional Authority (CPA) thought they should be shut down. When Iraq regained its sovereignty in 2005 the new government returned to Saddam’s policy of keeping them open to maintain employment, and to deter people from joining militant groups. Thousands of excess workers were hired as a result. In 2009 for example, Reuters visited a power plant in Baghdad that was suppose to have 2,500 workers, but had 4,370 on the books, few of which did anything. In July 2009 the Minister of Industry said that the average state employee only worked for two hours or less a day as a result. That same year the New York Times went to an electrical factory in Diyala. The U.S. helped renovate the plant in 2007, and then when the Ministry of Industry took it over, it expanded the workforce by 300%, and raised salaries, increasing costs and making it uncompetitive. The U.S. ended up having to subsidize the factory to keep it operating. The government has also failed to protect these businesses from foreign competition with tariffs as cheap imports have flooded Iraq since the 2003 invasion, and the country’s investment laws are confusing and contradictory since they are a mix of Saddam era legislation, CPA rules, and acts passed since 2005. Due to all of these problems business groups have complained that 90% of Iraq’s factories have closed since 2006. 

This latest effort to draw in foreign companies to help out Iraq’s state-run industries will probably fail like the previous ones. Iraq’s factories are money losers, and any investor would probably demand a drastic cut back in workers that the government would likely object to. Plus the country’s investment laws are a big deterrent, as well as the lack of tariffs. Iraq’s economy has been troubled since the 1980s. It has become more dependent upon oil since the overthrow of Saddam, and the other sectors have shrunk. These problems are likely to continue until the government is able to straighten out its laws and protections, and finally bring in outside help to modernize and finance its businesses.

SOURCES

Abbas, Mohammed, “Iraq investors face bloated workforce dilemma,” Reuters, 8/10/09
- “Iraq starts privatization drive, but progress slow,” Reuters, 7/28/09

Aswat al-Iraq, “90% of Iraqi industries suspended for 20 years – IFI,” 2/26/09
- “Imported products subvert Iraqi economy,” 2/24/08

Collier, Robert, “Imports inundate Iraq under new U.S. policy,” San Francisco Chronicle, 7/10/03

Desai, Raj, “Iraq’s Economy Needs More Than Security,” Brookings Institution, 10/23/09

Iraq Directory, “The Head of Commerce Chambers: More than 24 thousand halted factory in the country,” 2/24/09
- “More than 90% of Iraqi industries are halted,” 1/10/09

Mohammed, Mohannad, “240 Iraqi firms up for grabs,” Azzaman, 3/29/10

Myers, Steven Lee, “Many Investors Still Avoid Risks of Iraq,” New York Times, 9/28/09

Yacoub, Sameer, “United Arab Emirates to name ambassador to Baghdad,” Associated Press, 6/5/08

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