Postwar blues

'Fast track' plan to sell state-owned firms in Iraq is put on hold

By Stephen J. Glain, Globe Staff, 9/18/2003

WASHINGTON -- The Bush administration has told the World Bank the United States will put on hold plans to aggressively sell and privatize many state-run Iraqi businesses, another setback in what has turned into a tortuous reconstruction effort.

As recently as June, Bush administration officials declared they would liberalize and deregulate the state-controlled Iraqi economy as soon as possible. Tim Carney, a US adviser to the Iraqi Ministry of Industry, said authorities would introduce a "fast track" sale of state-owned companies that could begin within the year. The industry ministry controls 48 manufacturers who employ some 96,000 employees, while the trade ministry controls more than 100 small to mid-sized companies.

But US officials in charge of rebuilding Iraq now fear that privatizing industries would force the dismissal of thousands of people in state-run companies with bloated payrolls, exacerbating an unemployment rate estimated at 50 percent of working-age Iraqis since the fall of Saddam Hussein. The staggering jobless rate is blamed for some of the violence that has destabilized much of postwar Iraq.

Those concerns were expressed in a meeting in Baghdad late last month between the head of the US occupation of Iraq, L. Paul Bremer, and a team of World Bank officials. At the meeting, Bremer acknowledged the planned privatization of Iraq's state-run industries would be delayed because the country was too unstable to absorb the shock of swift deregulation.

"He was open to our ideas and was convinced of the need to slow down," said a World Bank official who attended the meeting. "We asked him to consider the ripple effects on the economy if we moved too quickly and he was particularly concerned about unemployment."

A spokesman at the Pentagon, the coordinating authority for postwar Iraq, said he failed to reach US officials in Baghdad with questions about plans for postwar economic changes.

World Bank officials said the Baghdad meeting was set up by Bremer, who gets high marks among non-US agencies for listening to various points of view. The meeting preceded by a few days the Aug. 19 bombing of the United Nations headquarters in Baghdad, where World Bank staff were gathering information for a study of the country's postwar reconstruction needs.

Some US officials worry about the complexity of Iraqi industry. Peter McPherson, the Treasury Department's coordinator in Baghdad, has said that regulators would have to wade through a swamp of murky loans before Iraqi companies could be declared financially fit for the auction block.

"No doubt there will be a high level of noncollectibles and troubled loans," McPherson said. "The tough part is evaluating the weakness of loan portfolios," and this will require a massive financial restructuring, he said.

The World Bank, an international lending agency, is compiling a detailed report on how much it will cost to rebuild Iraq after more than a decade of war and sanctions, and how the process should be carried out. A key component of the study, to be released before a crucial donors' conference next month in Madrid, will focus on the environment for foreign investment and whether the country could handle rapid and robust privatization. At a briefing at the UN in New York last week, the World Bank team told potential donors -- representing several hundred governments, aid agencies, and nongovernmental organizations -- that Iraq could have as much to lose as gain from pell-mell deregulation.

"We made the case that the Iraqi population is vulnerable and to liberalize right now would expose them," said the World Bank official who participated in the Bremer meeting as well as the briefing at the UN.

Despite the guerrilla war being waged against the US in Iraq, interest in the country among foreign investors remains high. Delays in privatization, however, will limit the volume of foreign investment at a time when the White House is scrambling for postwar financing. President Bush has asked Congress for an additional $87 billion to fund the costs of stabilizing and rebuilding Iraq, and that figure could escalate without ample contributions from non-US sources.

Oil sales, another potential source of reconstruction funds, have been limited to disappointing levels by sabotage and looting.

Though some rebuilding contracts have been issued -- the winning bids for three cellphone licenses are due to be decided soon -- foreign companies are reluctant to begin work in Iraq because of its perilous security condition.

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