U.S. Seeking Foreign Investment for Iraq
By RICHARD A. OPPEL Jr. [The New York Times]
August 28, 2003
THE OCCUPATION
BAGHDAD, Iraq, Aug. 27 - American officials here are preparing an order that for the first time in decades would pry open most Iraqi industries for foreign investment, opening a new lifeline for an economy starved of capital during Saddam Hussein's government.
The proposal, outlined in a memo by the top American civilian administrator here, L. Paul Bremer III, and circulated among the Iraqi Governing Council, is a step toward creating a relatively open economy in a region long protective of its domestic markets.
Aware of those sensitivities, the proposal excludes railroads, oil and natural resources, electricity, and water and sewage ? areas that are either linked to national security or that might inflame national resentment if opened to foreigners. The proposal would also permit foreign investors to take their profits out of the country, with no requirement to reinvest the money here.
A number of Iraqi political leaders, while supporting the proposal in concept, have raised concerns that it would create an uneven playing field for Iraqi business owners. They fear that it would allow foreign businesses with access to capital and credit to set up shop in Iraq while doing nothing to help Iraqi entrepreneurs obtain the financing that could allow them to compete against new entrants.
In particular, some members of the Governing Council say they expect Arab retailers from nearby Persian Gulf states to take advantage of the new rules early on, arriving with the money to finance nicer stores and bigger inventories than Iraqi shop owners, who have little or no access to credit. Other major industries in Iraq not exempted from the new proposal include food and agriculture, manufacturing ? including state-run enterprises ? and service businesses.
The proposal also cuts strongly against the grain of the socialist economic dogma that dominated Iraq for decades.
"Many on the Council have not overcome their fears about the need for protection," said Ahmad Chalabi, the Council member who is coordinating a committee studying the proposal. "The culture of the Iraqis has been a culture of fear that foreigners would take advantage of the country."
But American officials say the step is an important one to rebuild Iraq and, in effect, democratize the economy.
In the memo outlining the proposal, Mr. Bremer said that foreign investment would create more jobs ? with larger paychecks ? and introduce valuable technologies to the country. He also said he believed it would reduce the economic influence of wealthy businessmen allied with the Baath Party who profited from their ties to the Hussein government. Currently, those people control disproportionately large pools of capital, he said.
Mr. Bremer wrote in the memo that the "future prosperity" of Iraq would depend in part on how successfully it could attract foreign investors.
While the new rules may shape the Iraqi economy in the years to come, for now, practical decisions about investment are likely to be driven by the country's unstable security situation. In addition to attacks on American troops here, the rise of terrorism in Baghdad in the past month ? including a bomb that killed 17 people at the Jordanian Embassy and a truck bomb that killed 23 at the United Nations compound ? has also unsettled Westerners here.
Would-be foreign investors occasionally get a personal glimpse of the country's security problems when they arrive: armed robberies are common on the main road from Amman, Jordan, to Baghdad, as bandits armed with Kalashnikov rifles routinely hold up convoys of arriving and departing Westerners.
When Mr. Hussein was in power, investment by non-Arab foreigners was effectively barred both by the Iraqi government and by the international sanctions that followed the Persian Gulf war of 1991.
Arab investors were allowed only a minority stake in a business, people who have studied the laws said. The United Nations Conference on Trade and Development said $2.8 million in foreign direct investment flowed out of Iraq from 1997 to 2001.
All of Iraq's neighbors enjoyed positive investment flows during the same period, the conference said, including Turkey, which saw foreign direct investment of $6.78 billion, and Saudi Arabia, with $4.69 billion. But those numbers pale when compared with some much smaller Western countries. In Ireland, for example, foreign investment of more than $60 billion flowed into the country during the same five-year period.
Even though Mr. Bremer's proposal would end years of state ownership and closed markets, it still called for significant restrictions. In addition to barring investment in a handful of critical industries, the occupation authority and a panel of Iraqi leaders would have 60 days to reject any foreign investment of $40 million or more if they believed it threatened national security or if the investor had a "history of unlawful behavior."
An investment of that size also could be rejected for other reasons, including a determination that the foreign company or investor had not demonstrated "how the project will affect national goals such as employment creation, the development of national infrastructure, and technology transfer, as well as the impact on the environment."
Mr. Chalabi said some on the Council wanted other changes, including a mechanism for Iraqi businesses to obtain financing, which for most of them was nonexistent, so they could compete against well-financed businesses from abroad. Mr. Chalabi said the top American economic adviser in Iraq, Peter McPherson, met with a committee of Governing Council members on Monday and was "very amenable" to putting together a program to extend loans to Iraqi business owners.
Council members are pushing for other modifications, including restrictions on foreign investments that do not lead to the creation of jobs, such as the speculative buying and holding of land in the hope of profiting from a rise in values.
An official with the Coalition Provisional Authority, the civil administration led by the United States, said that the concerns about extending credit to Iraqi businessmen, and the rules for distinguishing between speculative and job-creating investments had been discussed among occupation officials and Council members. The concerns of the Iraqi Council members "were well taken and well understood," the official said.
Some on the Council also want more certainty that people who profited under the old government would not do the same under the proposed rules.
"We welcome foreign investment, that is for sure," said Adil Abdul Mahdi, senior adviser to Abdul Aziz al-Hakim, an influential Shiite member of the Council. "But we have to be sure there is no return of Baathist money," he said. "Many offshore companies have been created by ex-regime people," he said. He said he feared they could take advantage of open investment laws.
Mr. Mahdi also said the proposal should not leave poorly financed Iraqi business owners competing against well-financed foreigners. "We have to be sure we are really defending the interests of the Iraqi people," he said.
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