Studies

Back to Archive

Notes on Iraq: Reconstruction & Vitalization
Updated
(June 2, 2003)

Click Here to view the full report in slides.

The presentation is intended as an overview to be made with extensive verbal comments that allow for discussion and a Q&A dialogue. As such many complex subjects are addressed only from a macro perspective and therefore need extensive elaboration. The objective at this stage is to make planners aware of all the options that exist, given Iraq's particular circumstances, and to highlight that a fully integrated economic program including the various components identified is desirable and achievable.

The following brief notes may provide additional clarity in understanding the parameters of the proposed program.

Macro

1. Implementation: It is imperative that one body is charged with and has authority and responsibility for overall execution and co-ordination. This can be accomplished in one of two ways:

a) A "Super Ministry of the Economy" is formed during the transition period. This Ministry would have certain powers from the ministries of Finance, Commerce, Industry and Planning. It would be staffed exclusively by technocrats in the various fields and have the authority to draft regulations that can be fast-tracked for approval by the government.
b) An "Economic Commission" made up of the various relevant ministers and headed (chaired) by an independent non-governmental individual. The Commission must have its own independent staff of technocrats and have similar powers as those set out above to fast-track regulatory approvals.

2. Debt: It should be recognized that the main drag on economic growth is the debt and reparations overhang. At c$190 billion plus interest this is crippling to a nation that has a GDP of $50 billion and need for substantial economic and social reconstruction. If this is not resolved in a constructive and equitable manner the expected growth will simply not materialize. A number of options are available:

a) The debt can simply be forgiven (written off) in recognition of the fact that it was incurred by a rogue government whose other actions have all been castigated and undone by the international community.
b) Any part of the debt that can be shown to have been extended for genuinely commercial ends to the economic benefit of the country is honored and restructured in a realistic repayment program. Keep in mind that some of this 'genuine' debt is currently selling at a deep discount on the open market.
c) The debt or part thereof, is traded for points that can be redeemed by the creditor(s) to enhance their ability to win future contracts. This is tantamount to companies effectively buying the points from the creditor then using those points as part of their bid price in tendering for work or licenses in the country. The application of the points can be very broad to allow their use in many sectors.

Micro

Privatization Issues: The fact that the state (through nationalization and expropriation) owns over 80% of the productive economic assets of the country must be recognized and immediately addressed. It is only by shifting these assets squarely back into the private sector that the economy will be properly invigorated and set on a path of sustainable long-term growth. Such a massive "privatization" program is however fraught with pitfalls and while imperative to be implemented quickly, must include a number of safeguards to preserve its integrity and political acceptability.

1. Partial & Deferred Valuation: In the process of shifting assets to the private sector special attention must be paid to avoid the accusation of having sold the assets too cheaply. Given the political rating of the country and the fact that these assets have at best been largely idle or severely degraded (due to lack of maintenance if nothing else) it is quite natural to command very low valuations at this time. The full sale price of these assets is therefore not necessary to be established immediately. A sale price can be structured in a manner whereby ownership is transferred with a partial payment leaving the balance of the purchase price to be determined at a pre-agreed future time. Future purchase payments can be made in accordance with a formula as a multiple of cash flow, earnings, market-share or some combination depending on the particular asset/business in question.

2. Put/Call Options: In certain sectors it may be necessary to either provide an incentive to investors to protect their long term exposure in the form of an exit (a put). Conversely where a deal is very attractive and the government want to enable a quick launch but protect its long term interests and re-purchase for a subsequent public offering (thereby a call). These instruments can be structured to protect the long-term interests of both buyers and sellers.

3. Voucher Programs: Such programs were used in Eastern Europe as the economies were transferred from the communist governments to the private sector. It was a manner to enable the immediate re-distribution of wealth at a grass roots level. These were however designed in a hurry, not properly thought through and the population not sufficiently educated. As a result, they ended up being badly exploited and concentrated the wealth in the hands of oligarchs and other large predator investors. With the benefit of hindsight and a population with a mercantile history, it is believed that the previous problems can be avoided and a more effective program put in place.

4. De-Nationalization: Many productive assets were nationalized or expropriated with artificial or no compensation. For the most part the owners of these assets ended up leaving the country. It is important to attract the human talent and skills as well as provide restitution for such owners. However this should also be tied to some obligation on the returning owners in terms of further future investments in modernizing and upgrading the businesses. This not only recognizes the concept of ownership again and provides an incentive for private investment (by the owners) but also lightens the burden on the government as responsibility is shifted squarely to the private sector.

5. Offset Programs: many countries with varying degrees of success have used Offset. It is believed that such programs can be successful in Iraq given the skilled labor force, the scope of the economy and the amount development and re-construction needed. Iraq has a good chance of avoiding the pitfall that normally plagued such programs. Generally these programs have failed on a number of fronts:

a) The countries did not have a large or diversified economic base to present sufficient opportunities.
b) The companies with offset obligations were thrust into an economic development role to which they were ill suited.
c) The offset contracts themselves were poorly structured allowing for significant loopholes, which effectively meant that they were often not honored.
d) Time was not of the essence which resulted in the obligations being continuously deferred and eventually abandoned.
e) Obligations were mostly tied to defense contracts and thereby because of their military nature bypassed normal channels of the economy.

Understanding the shortcomings of other countries in implementing such offset programs can help in the redesign of these programs in a manner to make them workable in Iraq.