Iraqis said to OK new airline

WASHINGTON -- The Iraqi interim government, in a backroom no-bid deal, has sold much of the country's air industry to a Jordanian firm and a prominent Iraqi family, according to a watchdog group.

A contract for the creation of a new Iraqi airline and related services was negotiated and signed in December without the knowledge of US authorities in Iraq, according to a report by New York-based Iraq Revenue Watch. Such a transaction could intensify suspicion in Iraq that postwar reconstruction is being controlled by a handful of large foreign companies and prominent Iraqi clans that have dominated the nation's economy for generations. Rend Al-Rahim, Iraq's ambassador to the United States, said she was unfamiliar with the Iraq Revenue Watch report but acknowledged resentment among ordinary Iraqis with the way the country's leading families are snatching a growing share of postwar business.

"There are a number of companies that are better able to win contracts than others because they have the sophistication and the capital," Al-Rahim said. "And there have been protests by those who think these companies have been given favored status at the expense of others."

Robert Dawes, inspector general of the US-led Coalition Provisional Authority in Baghdad, said via e-mail that he and his staff are studying the report, written by the Revenue Watch director, Isam al-Khafaji. "We'll get to this matter in due course," Dawes said by e-mail.

Iraq Revenue Watch is associated with billionaire investor George Soros, who is sharply critical of the war in Iraq and is funding a campaign to unseat President Bush in November. Its report cites an Arab-language contract, a copy of which has been obtained and translated into English by the Globe, which provides for a new flag carrier to be owned jointly by the contract's main signatories: The Iraqi ministry of transport, a Jordanian company called Alia Transport and General Trade, and a member of the Khawwam family.

"This does not bode well for the reconstruction of Iraq's economy," al-Khafaji wrote. "It raises serious concerns about the CPA's ability to manage the economy."

The new airline, to be called Iraqiyya Aviation Co., will be tightly controlled by the three main shareholders and enjoy a monopoly over Iraq's aviation sector. The contract gives the airline control over "commercial and tourism agencies, aviation agencies, [and] related activities." It allows the transport ministry final say over how Iraqiyya Aviation hires its staff, and effectively prohibits the creation of a rival carrier by making Iraq's air-service agreements exclusive to the airline.

While such a broad mandate and tightly controlled management structure would be common among Middle East airlines, it is vastly at odds with the US government's mission to replace Iraq's state-run economy with a free-market system.

The transport ministry will raise Iraqiyya Aviation's $25 million in start-up capital by auctioning off the assets of Iraqi Airways, Iraq's former flag carrier, according to al-Khafaji's interpretation of the contract's Article 5. That clause empowers the ministry to sell its "property," including "airplanes, equipment, construction, concessions, agreements and rights with the Civil Aviation Authority and civil aviation companies worldwide."

The launch of Iraqiyya Aviation Co. could pose a serious challenge to the coalition's own plans for Iraq's aviation sector. At the Dubai air show in December, Frank Willis, the then-US adviser to Iraq's transport minister, unveiled an ambitious program drafted by a top US aviation consultant to rebuild the country's air industry around a new airline that would operate in partnership with regional carriers. The presentation even identified Delta Air Lines Inc. as a possible foreign partner.

Willis, who could not be reached to comment, gave no indication in the briefing that a deal to create a new carrier had already been signed.

Stephen J. Glain can be reached at glain@globe.com.