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SOE Reform: The Foreign Firms’ Perspective

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16 February – Project Working Group, Paris, France
Thematic session II: State-Owned Enterprises (SOEs) and Investment
SOE Reform: The Foreign Firms’ Perspective – Marc TEJTEL, Deputy Chief Counsel, Commercial Law Development Programme (CLDP), US Department of Commerce

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SOE Reform: The Foreign Firms’ Perspective

  1. 1. SOE REFORM: THE FOREIGN FIRMS’PERSPECTIVE OECD Iraq Conference February 16, 2015 Improving the business and investment climate in Iraq
  2. 2. AKey Conference Question: How can Iraq attract investment in its SOEs? • To answer the question, it is important to understand the perspective of foreign firms. • CLDP, acting at the behest of the US Embassy in Iraq, within the context of Iraq-US technical cooperation, has been working since 2011 to build the capacity of MIM SOEs to form, strategic partnerships with foreign firms. • CLDP interacted with several foreign firms, primarily Turkish and US, who have formed or have considered forming partnerships with SOEs.
  3. 3. IRAQ-USTECHNICALCOOPERATION: CLDP’s MISSION • A single US ministry’s mandate includes industry/manufacturing, technology, standards, industrial research, international trade, trade remedies, telecommunications, oceans, economic development • This ministry is the Department of Commerce. It has 45,000 employees. The Commercial Law Development Program (CLDP) is the technical assistance arm of the U.S. Department of Commerce. • Since 2008, CLDP, acting at the behest of the US embassy in Iraq, has been working with several Iraqi ministries and agencies (MoO, MiM, MoE, MoP, MoT, NIC), with Iraq’s judiciary, with the Shura Council, with COMSEC, PIMAC, with the COR, with governorates (Basrah)
  4. 4. CLDP’s COOPERATIONWITH MIM’s SOEs • May 2011: Seminar in Baghdad; MIM and CLDP jointly design a multi-year program to build capacity needed by SOEs to form alliances with foreign firms. • June 2011: Workshop in Istanbul; matchmaking sessions • October 2011: Three-week workshop in DC; simulated JV and IP licensing negotiations; matchmaking sessions. • June 2012: Training for top managers (10 SOEs; managing in competitive environments; Koc U) • August 2012: OSHA training (Industrial Safety Practices) • October 2012: Contract drafting/negotiation workshop (USA) • January 2015: Workshop/Transactional Lawyers (Istanbul)
  5. 5. FOREIGN FIRMS KNOWTHE SOES’CHALLENGES • SOEs are only a fraction of Iraq’s industrial units but account for the quasi totality of total industrial production. (1) • SOEs have obsolete machines and equipment, and they do not follow global technological and quality standards. (1) • In 2013, most SOEs were operating at less than half their full capacity. (1) • A large number of SOEs rely on government subsidies to pay wages. (1) • For compelling reasons, there is a large number of redundant employees in SOEs. • (1) Source : Iraq’s Industrial Strategy Up to 2030 (MIM)
  6. 6. FOREIGN FIRMSARE INTERESTED INALLIANCES • In 2011, MIM, CLDP, the Istanbul Chamber of Commerce organized meetings in Istanbul between 10 SOEs and Turkish firms: In one day, there were 120 meetings. • For foreign firms: - Iraqi SOEs have staying power as well as access to a growing and solvent market. - Several Iraqi SOEs have excellent management teams. - MIM has significant R&D capabilities (CIRD) - SOEs from several countries (e.g., France) have an excellent reputation
  7. 7. ALLIANCES HAVE BEEN FORMED • “Encouraging strategic alliances with foreign investors and competent local investors” is a pillar of MIM’s strategy • UN SOE Valuation study, McKinsey’s report, support such alliances • Most common model: Foreign firm invests in SOE production line for goods needed by Iraq’s market; SOEs manufactures and distributes; profits are shared
  8. 8. WHYFEWSUCCESSFULALLIANCES ? • Differences in industrial/business/safety/quality cultures • Lack of SOE decision autonomy • Overall business enabling and regulatory environment • Ambiguities in Legal status of SOEs/Foreign Firms joint- ventures (Law 22/97; art 15; par 3; Law 21/97 amended 04; art 12) • Land issues
  9. 9. APOTENTIAL INCREMENTALAPPROACH ONTHEWAY TO MIM’s ROADMAP FOR SOE RESTRUCTURATION • MIM has defined a clear and logical roadmap for SOEs reform leading to corporatization. • As part of the implementation of the roadmap, Iraq can create, through strategic alliances between SOEs and foreign firms, small-scale successful industrial entities. • These small-scale entities could serve as “laboratories”and, later, as models, for changing large-scale SOEs’ industrial/business/safety/quality culture.
  10. 10. POTENTIALINCREMENTALAPPROACH: KEYSTEPS • Identification of unmet need in Iraq’s market that a SOE/Foreign Firm alliance could meet competitively • Joint project to meet this need: - Assignment of dedicated staff and dedicated facilities - Training/capacity building of staff - Decision-making autonomy - Leadership commitment (based on trust and win/win) - Separate accounting • After break-even is reached, formation of joint subsidiary; dedicated staff detailed with “ right of return”; Iraqi manager’s accountability based on management performance contract
  11. 11. CONDITIONS FOR SUCCESS Encouragement to “Viable, Self operating, attractive and ready for Investment” SOEs to seek such alliances. Amendments of laws 22/Law 21 to make joint SOE/Foreign Firms subsidiaries possible, with foreign firm having control of some strategic issues (e.g., IP ) Agency empowered to resolve land and regulatory issues Role of government as facilitator/driver of industrial development Economic initiatives not explicitly prohibited will be authorized  Iraq’s joining New York Convention on Arbitration

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