Iraq Banks on Investors in Bid to Privatize

BAGHDAD â€”  At less than a nickel, a bar of Iraqi-made Health soap would seem a bargain. But even at that government-subsidized price, there are few fans of the foul-smelling, industrial-strength stuff.

“You wouldn’t wash your dog with it,� one Iraqi said. “If you did, I swear, its hair would fall out.�

The old Saddam Hussein regime tried giving it away as part of U.N.-supplied relief baskets sent to families. But instead of using the dingy yellow bars, many consumers stockpiled them until they had enough to swap for one cake of something decent.

So perhaps it’s not surprising that the soap factory ended up on a list of struggling state-owned companies that may be among the first to be privatized. The newly appointed Iraqi industry minister plans to lease the Baghdad plant and 17 others to investors in hopes of nudging Iraq’s quasi-socialist economy toward a free market.

The question now is, does anybody want them?

That’s just one of many challenges facing U.S. officials as they move to privatize the Iraqi economy, a process seen as crucial to rebuilding the country. Other obstacles include a budding labor movement, newly unfettered foreign competition, a lack of security and, most recently, an emerging power struggle between U.S. and Iraqi officials over how best to proceed.

Without a doubt, there are gems among Iraq’s 190 state-owned enterprises, and officials remain optimistic that they’ll find buyers. Among the best are a leather factory renowned for its jackets and shoes, a drug plant specializing in high-quality knockoffs of Prozac and Viagra and some agricultural businesses, such as rice and date producers.

Iraq’s cement factories have also traditionally been big exporters. On Saturday, the Al Muthanna Cement Co. -- a facility in the southern town of Samawa that was once suspected of producing chemical weapons and later was shut down due to looting -- came back on line, to the delight of its 750 employees.

But in light of much-publicized problems with aging equipment and mismanagement of the country’s oil and electricity infrastructure, investors are wondering how many of Iraq’s state-owned firms are in even worse condition. Rather than lucrative fixer-uppers, some factories may turn out to be costly teardowns, they say.

“These companies were all subsidized by the government before,� said Mohammed Sadik Yassin, a Baghdad businessman who owns a large poultry farm. “Most of the factories are overstaffed. They may look tempting at first, but eventually they may not turn out to be profitable.�

In fact, most state-owned firms are believed to be unprofitable, although no one really knows because their books have been destroyed or were never properly kept. Expenses from electricity to raw materials were subsidized, and the government inflated demand by keeping prices artificially low and doing much of the purchasing itself.

*

Longer Than Expected

During and after the U.S. invasion, several factories were bombed or looted. About half are idle because there is no demand or they can’t get supplies or raw materials.

Already, the privatization program, which U.S. officials began mapping out before the invasion, is taking longer than many in Washington hoped. Thomas C. Foley, a big fund-raiser for President Bush who heads Iraq’s private-sector development, now predicts that the transition may take three to five years. “It’s going to take a long time to convert these assets,� Foley said.

That timetable is disappointing news for the U.S.-led coalition, which was betting that the private sector would take the lead in reconstructing Iraq. Over the next three years, state-owned business will need at least $1 billion in subsidies just to pay workers and stay afloat, not counting needed repairs or reinvestment, according to the country’s 2004 budget. U.S. officials are eager to shift those costs to investors.

The latest wrinkle in the privatization program is a dispute between American advisors and the U.S.-appointed interim government over how quickly to move and exactly who’s running the show.

This month, Mohammed Tawfik Raheem, the new minister of industry and minerals, ran a full-page newspaper ad listing 18 state-owned firms that he intends to lease to investors for five to 10 years, a test run for privatization. Bids are due Nov. 11.

But Raheem opposes further steps toward actual sales of companies until a new Iraqi government is elected. “I won’t talk about privatization because we don’t have a law,� he said. “We are not selling the companies.�

Asked if one of Foley’s mandates is to privatize the state-owned firms, Raheem said, “That’s not his job. It’s the Iraqis’ job. We own the factories. If they are going to be privatized, it will be the decision of the owner, not someone who is an advisor.�

Foley, a banker with the former Citicorp who went on to found a leveraged-buyout firm, insists there will be no fire sale and Iraqis ultimately will call the shots. But he suggested that Raheem lacks the authority to launch his leasing program, which took Foley somewhat by surprise when he saw the newspaper ad.

“It’s not clear whether he has the power to implement that,� Foley said. He also noted that some of the conditions of the program are likely to be unacceptable to investors, such as a ban on laying off workers.

(Foley later clarified by e-mail that other senior coalition advisors had helped develop the leasing program, which he said would not interfere with his efforts.)

Foley said he is developing his own privatization plan for about 150 of the 190 state-owned businesses, excluding oil and electricity facilities.

His proposal will call for new commercial and privatization laws as well as a new agency to devise and oversee the sale process.

*

Regional Interest

With Foley set to unveil his plan in early November, he and Raheem appear headed for a showdown before Iraq’s Governing Council. But Foley and Raheem agree on one thing: Private-sector interest in the state-owned businesses will be brisk, particularly among Iraqis and investors from neighboring Arab countries.

Despite the hurdles, state-owned firms have a head start, thanks to their relations with vendors, access to raw materials and skilled work force, Foley said.

“It’s not so much that people won’t be interested,� Foley said. “It’s more an issue of what price someone will be willing to pay.�

Raheem said he has already received interest from several dozen investors for his leasing program -- although so far, none are from the United States or Europe. Even the General Co. for Vegetable Oils, which makes the infamous Health soap, may have some takers.

Jafar Yassin, who owns Bunat Construction Co., is working with Iraqi investors who think the soap factory can be turned around with better management and quality controls. He recalled that the factory was privately owned in the 1960s and enjoyed a much better reputation.

Asked if he’s worried about outdated equipment, Yassin said, “It may be poor by American standards, but keep in mind these factories have been working for 50 years.�

Last month’s decision by the Governing Council to open Iraqi industry to foreign competition creates another challenge. For years, state-owned companies were protected by import bans or steep tariffs, sometimes as much as 75%. Now the council has opened Iraq’s borders to investment, permitting companies to compete freely with import taxes of just 5%.

It’s all making factory managers and workers increasingly nervous about the future. Already, top managers at most state-owned firms have been swept away as part of the program to remove former Baath Party officials from positions of influence. But the new factory leaders are wondering how long they’ll be able to keep their jobs amid calls for privatization.

“Everything is changing day to day,� said Adel Sadiq, assistant director-general of the General Co. for Vegetable Oils, which operates six plants, including the soap factory.

Much of his machinery is 30 years old and needs to be replaced. Since the end of the war, he’s been able to bring back about 85% of his 3,600 workers, but plants are running at 25% to 30% of capacity. In some cases, equipment was stolen. In others, suppliers have cut him off, fearing they won’t be paid.

Other managers seem to be in denial. “The government will never sell this plant. Why would they? It brings them income and we do a better job than private managers would,� said Said Ali, director-general at Muthanna Cement. In fact, Foley says the cement factory is on his privatization list, although it would be among the last to be sold.

Many of the 300,000 workers at firms earmarked for sale are anxious about privatization and are moving to organize into unions. Under Hussein, workers’ syndicates were outlawed. But outside the Ministry of Industry and Minerals one recent afternoon, two dozen workers at the state-owned leather factory exercised their new right to protest.

“Private owners will fire most of us,� said Jawad Khaduim Bidan, a commerce director for the plant. “They will think only about making money.� The workers also want back pay and the reinstatement of their fired plant manager.

Amid Iraq’s estimated 70% unemployment rate, the protesters’ threat of a strike appears unrealistic.

But for those trying to nudge Iraq’s economy toward capitalism, there was also a positive sign at the protest. Among the workers’ list of demands: a cut of future profits.