Private sector growth in Iraq is seen as key to creating jobs, economic development and reducing the country’s oil dependency. In an effort to remove obstacles and boost business opportunities in Iraq, Sida is supporting the World Bank’s private sector development programme. The focus is on supporting the Iraqi Government to improve state-owned companies, reduce regulatory burdens on private businesses and improve the dialogue between the private and public sectors.
Iraq has the world’s third largest oil reserves, but despite the fact that the oil sector accounts for 95 per cent of revenues it only employs one per cent of the total workforce. All in all 65 per cent of the entire workforce in Iraq, 3.5 million, are employed by the Government. The remaining 35 percent typically work for medium to large-scale family businesses. Roughly 40 percent of all small businesses are informal. An estimated 17 percent are unemployed and 30 percent underemployed. Added to this, every year half a million young people leave school to find very few job opportunities. The private sector is a force that could diversify the economy and generate new jobs.
“The most significant programme is the reform of the state-owned companies. There are 180 state-owned companies which employ over 630,000 people. These companies have an enormous impact both in terms of size and their impact on the economy and are, at the same time, part of the government,” says Dr. Stephen Rimmer, Senior Private Sector Development Specialist at the World Bank in Bagdad.
As many as 300,000 employees at the state-owned companies are inactive. The government is opposed to privatisation but is open to measures that would make state-owned companies more efficient and competitive. One course of action that the programme is supporting is to move inactive workers to other ministerial departments. The inactive workers still receive their salaries while enabling state-owned company to become more commercially viable.
Subsidies to the state-owned companies amount to around four per cent of the annual budget, which, according to Stephen Rimmer, is a great burden on the Iraqi economy and budget:
“Probably 80 per cent of the companies are not currently viable in a commercial sense. The topic is politically sensitive and the Government is not ready to privatise, but is happy to employ Private Public Partnerships to attract private sector investment and expertise.”
Instead of privatizations the World Bank, together with the Government, support efforts to modernize state owned enterprises so that they operate commercially as competitive businesses, including forming partnerships with the private sector.
“The programme is progressing well. There are already several public private partnerships in Iraq and World Bank supports blueprints for finding private partners for the state companies. One recent example is the state drug industry that partnered with a company from Jordan,” continues Doctor Rimmer.
Another example is the World Bank recommendations to Al Mansur, a state-owned construction company, to specialise in building affordable housing, which enables it to provide houses to low income Iraqi’s while not competing in areas where the private market is more efficient.
The good infrastructure, education and healthcare systems gave Iraq middle-income country status in the 1970s, but since the 1980s poverty has worsened due to wars, blockades and poor central government policy. The latest available data suggests that in 2007-2008 one in seven people in Iraq live on less than $1 per day and half of the population live on less than $2 per day.
The most recent World Bank report, Doing Business 2012, ranks Iraq in 164th place of 183 countries reviewed, particularly weak in areas such as starting a business, construction permits, closing a business, credit provision, protecting investors, trading across borders and enforcing contracts. In a survey commissioned by the World Bank, with the support of Sida, around 800 companies across Iraq, roughly 70 per cent, stated that power cuts, corruption and political instability were the major constraints to their businesses.
Private sector development alone will not end politically fuelled violence and political instability in Iraq, but improved regulations and regulatory administration could improve the business climate which in turn could lead to a more positive general view of the future. Today one major obstacle for private businesses is the vast number of laws (29,000) passed in recent decades:
“Many of these laws are obsolete and conflict and overlap each other. They are in desperate need of review, but the various ministries that regulate them are very weak. Also, the laws are unclear and businesses have concerns about corruption,” explains Stephen Rimmer.
A first step in harmonising the regulatory work within the Iraqi Government is forming the Regulatory Reform Unit within the Council of Minister’s Secretariat, which is one level below the Prime Minister’s office.
“The key thing is that the political level recognises the importance of developing the private sector. Politicians are very aware of the institutional weaknesses in Iraq. The challenge is in getting the reforms implemented, particularly those that involve more than one ministry,” continues Stephen Rimmer.
A constructive dialogue between the private sector and government is a prerequisite in any society and the World Bank, with support from Sweden, is encouraging business chambers in Iraq to cooperate in a newly formed umbrella organisation called the Private Sector Development Center.
“There is a broad spectrum of business chambers in Iraq but weak capacities and the rivalry between them impedes cooperation and coordination. We are striving to establish a new business group that would improve the private sector linkage between existing business groups and bring about better coordination and dialogue. The role model for this is the Swedish Chambers of Commerce, and representatives from Sweden were in Bagdad to show that a central umbrella organisation does not take over the roles of the existing chambers but rather complements them.”
The Private Sector Development Center can bring together the existing chambers of commerce into a stronger voice in their dealings with the Government.
THE PRIVATE SECTOR DEVELOPMENT PROGRAM IN IRAQ:
1. The total contribution is US$14.4 million, of which Sida’s contribution is $7.4 million.
2. The program runs between 1 January 2010 and 30 March 2014.
3. Expected goals of the program is to support the development of the private sector in Iraq, reduce Iraq's reliance on the oil sector, increase employment opportunities and jobs for Iraq's growing workforce and reduce poverty.
4. Results of the program up to June 2012:
- Supporting reforms of State Owned Enterprises including a new Government reform policy and direct support to 80 of Iraq's 180 State Owned Enterprises to corporatize and commercialize, including three 'pilots' to attract private sector partners and internal reforms to better manage the State Owned Enterprises.
- The establishment and operation of an Asset Valuation Unit within the Ministry of Finance,
- Reports to better understand the challenges and opportunities faced by the private sector highlighting the main impediments to the private sector.
- The establishment of a Regulatory Reform Unit to oversight and provide quality control for proposed new regulations.
- Improved coordination between development partners.
- With the Central Bank of Iraq to improve supervision of the financial sector, including supporting provision of micro-finance, with a particular emphasis on supporting businesses owned by women.