Iraq Attempting To Privatize Its State-Run Businesses Once Again

At the end of September 2010 Iraq’s Industry Ministry offered up ten state-run factories for investment. Foreign companies were offered 15-year production sharing agreements mainly in cement, petrochemical, steel, and pharmaceutical businesses. The Industry Ministry owns 60 firms altogether that control 250 plants. It’s hoping to privatize all of them by 2020. That seems highly unlikely.

The Industry Ministry has tried to privatize before with few results. In March 2010 for example, the Ministry said that it was going to auction off all 250 plants it runs. That was at least the third time it had made such an announcement. So far, only five deals have been reported since 2003. In 2009 it signed a contract for the North Fertilizer Company in Baiji, Salahaddin with Japan’s Marubeni Corp. The Deputy Industry Ministry claims production has increased 30% since then. In April 2010 Baghdad also cut a deal with Larfarge SA, the world’s largest cement producer. Negotiations over other companies were started, but never finalized.

Investing in Iraq’s state-run businesses faces a series of major challenges. One is that they employ thousands of unnecessary workers to keep the unemployment rate down in the country. A consultant to the Central Bank of Iraq for example, told Azzaman in September that 90% of the public employees didn’t deserve their jobs. The government is unwilling to let many of these workers go however, out of fear that they might join militant groups or lead to social unrest. At the same time keeping all those workers makes the companies highly unproductive and expensive to run. Baghdad has even offered subsidies in some cases to keep people working at factories that were up for privatization. Iraq also has very few tariffs to protect their domestic industries at a time when the country is being flooded with cheap imports, the investment laws are obtuse, contradictory, and hard to decipher, and corruption adds extra costs. Finally, the government has arbitrarily taxed and attempted to change deals with foreign companies in the past. 

Today, Baghdad wants foreign investment, but is afraid of some of the consequences of privatization. Probably only the most attractive firms the Industry Ministry owns will attract foreign interest. The rest can be kept open as a costly, and inefficient jobs program, or they can be closed, which will increase unemployment, and could lead to instability. That makes deciding the fate of the state-run businesses a difficult one for the government. There are already some pressures from within the Maliki administration against the excessive number of public employees. Still, with billions of extra dollars expected to flow into Baghdad’s coffers with the recently signed oil deals, officials may just take the easy route and keep many of these businesses running rather than suffer the consequences of shutting them down. Which way Baghdad goes will be decided by the next regime, and could be a telling event as to whether Iraq is heading towards a more market oriented economy, or will maintain its state-run system.

SOURCES

Chaudhry, Serena, “U.S. firms say Iraqi regulation a challenge to trade,” Reuters, 10/5/10

Department of Defense, “Measuring Stability and Security in Iraq June 2010,” 9/7/10

Razzouk, Nayla, “Iraq to Offer Tenders to Revamp 250 State Industrial Plants, Official Says,” Bloomberg, 9/28/10