The Privatization of Manufacturing Idustries in KR and Iraq

2014

By Dr. Razzaq Othman Mustafa

The development period pre-2003 is characterized by a lack of resources especially financial resources. In contrast after 2003, the economy has rapidly been modernized by the inflow of oil revenues and the promotion of private sector, capital investment and FDI development and privatisation.

Government market intervention is minimal, and the economy has become open, liberal and the private sector has operated effectively. The inflation and wages increased and the corruption expansion have deteriorated the competitiveness and development of local industrial production.

Meanwhile, in order to increase the possibility of success in the implementation of new law of investment (No.4 in 2006) in Kurdistan Region (KR), it should be focused on the investment of infrastructure in KR. However, here raise some questions,

Has KR a relatively suitable investment climate for privatization in accordance with legal and constitutional safeguards?!

The developmental policies in KR during the period 1991-2003 characterized very sluggishly due to the political and social reasons, in addition, to the lack of centralized common regulatory, as well as two crippling blockades on KR.

During the period 2003-2011, Kurdish administration has begun planned steps toward economic growth and the provision of goods and services by high social values to the population and improvement in infrastructure, such as improving the level of health and education, constructing roads, transportation, rebuilding the destroyed villages, and providing them the various supports.

The situation of the manufacturing industries during 1982-2011

The experience of privatization in industrial sector (after land, agriculture sector) was in most expand volume and according to the existence data and its analyse capabilities, in below supply the most important approaches for transferring the ownership of economic sector which involved to privatization process in KRsˈ experience, as follows:

1. Renting approach: According to the low No.32 in 1986 for organization the procedures of sale and rental of state funds, it is seen the most important public MI’s which involved according to this law.
2. Building, operating and transfer (B.O.T) approach: According to this approach, make an agreement between the state and PS for building and managing the specific projects and for limited period less than 25 years, later transfer the ownership of this project to the state.
3. The approach of Building, Ownership and Operating (B.O.O): KRG used this approach for privatization of the projects carry out the functions of basic services (such as Health, education, communication) which before monopolized by the state for purpose the politic and social more than been economic targets.
4. After the KRG’s orientation to encouraging the PS, it gave opportunity to the PS to establish the centres and particular institution in the field of health, education and communication in the KR since 1993 according to the resolutions and laws passed by Iraqi Kurdistan parliament and the KRG.
5. Sales approach: Depending the resolution 6132 in 26.11.1998 passed in KRG’s council of ministers has being sold around 1500 public houses and apartment in different ministries to the citizens dwell in it after 1991 at nominal prices.

The privatization history in KR

The manufacturing privatization in KR divides in three major phases, as:

First Phase (1982-1990):

In Iraq, it began in the early 1982 where it was the first rental process from the public enterprises belonging to government to the PS. The privatization in this time related to the economic reform program, which the Iraqi government had begun in the early of 1982 for participation the PS in the economic activities by promulgating some laws and resolutions in the early 1982 and ending to the law No.32 in 1986 titling (The law of buying and rental of public assets). Other resolutions such as resolution number 132 in 1987 related to (the nominal capital launching of joint stock companies) as a first step for implementing the reform program titling “February reformist”, as well as the law number 774 in 1988 to exempt particular projects in the PS from fees and taxes for specific periods. In addition commercial law number 42 in 1989 for encouraging the PS and its contributing in the commercial activities.

Second phase (1991-2002):

After the 1991 events had led to full withdrawal of central administration in KR, and formation of Kurdistan Regional Government (KRG), the election of 1992, and resulting the double economic blockade inside of UN and Iraqi government on KR, it has appeared the horizon a set of orientations which trend to the activation of the PS role and privatization.

The applied financially/economically policy portfolio faced in KR has threatened economic stability due to the pressure factors on the aggregated expenditure resulting from increasing governmental expenditure that worked strongly during the role of the expenditure multiplier budget in 1980s and after 2003. However, it has to be mentioned, thereby, the structural imbalances increased and the degree of economic and social inequality among the population deepened, which emptied the fiscal policy of its economic and social content in achieving development goals, even do not have a regular and active the target. It is weaker than the degree of effectiveness of public finances in the performance of its functions.

The justifications for privatization are:

1. Withdrawal of the Iraqi central government administration in KR and imposed an unfair economic blockade. In addition to the weakness of KRsˈ financing resources capabilities newly forming in the ruins of collapsing economic sectors, were combined from the objective circumstances which had led to controlling the PS especially in MI’s, and in general on commercial activities (local and foreign trade) and the majority of other sectors, except such governmental service and some public MI’s. For KRG’s did not rest main role in the commercial in particular and in economic activities in general, while its main dependence had been on the customs duties, certain taxes, fees and a few other resources.
2. The weakness of KRGs’ financing capabilities and its capabilities to absorption of most of economic sectors and manage it, as well as lack of any economic policy inside of KRG for supporting the economic activities for the period 1991-2003.
3. Political and militarily competition and civil war in KR for the period 1994-1997 which had led to universal weakness for whole economic sectors resulting of continually stopping and stalled productive MI’s in KR, in addition the weakness of government in management of economic activities.
4. The absence of infrastructure and weaken of financing situation or the weakness of government budget in worst score where it depends to the extent on the ration and the aid of international humanitarian organization. Nevertheless, with that with any support inside of foreign organizations or UN, the KRG attempted to restart or/and re-operating or buying the machineries and equipment’s for remaining the public MI’s in this period.
5. The weakness of market activities, lack of central organizational in KR and the existence of two states (Kurdistan Democratic Party(KDP) controlled the state based in Erbil and Patriotic Union of Kurdistan(PUK) controlled the state based in Sulaimany) due to the civil war, increase the unemployment, in particular high rate of disguised unemployment.
6. Continuation of the resolution and laws issued by central government before 1991 continued by the KRG until now with some legal amendments except for other elements pushed the government to allow the PS to work in all economic sectors for the period 1992-2002. As well, applying the privatization programs in the MI’s that was exposed to losses or the sectors were not allowed for the PS to work on it in previous periods.

Phase III: after 2003:

This phase begin by Kurdish federalism’s claim inside of Kurdish leaders and political authorities. Despite the existence two states they had built many tasks which imposed during the past years, and had started to them first step to construct a set of functions such as; joining the two states and strengthening the KRG, building an economic base, attempting to following the planning approach, investment increasing in infrastructure, specification the parties faithful cadres in KRG for constructing an economic base based on market economic, which led to improvement of standard of living in KR.

This period characterized by following:

1. Particularly after 1997, the political orientation of KR has oriented toward for allowing the escape for PS and market liberalization and competition and governments department away from some economic field which the PS could work more efficiency on it.
2. The huge capacities for PS and raising the rich class that has capabilities to manage the economic activities better than public sector and capabilities to open the free trade market between each one of Turkey and Iran. Therefore, the PS controlled completely the commercial activities after 2003.

The problems and obstacles of the privatization process in manufacturing industries in KR:

As all other developing countries in privatization experience, the privatization process has faced many problems and obstacles on proper applying program successfully in KR. Thereby, the main roots of these problems are:

A. Lack of legal document and popular supporting for it, despite the existence of KRsˈ parliament these experiences were not based on particularly laws and legislations for its implementation. Which needs for the purpose of legislation and identify implementing this process in various economic sectors, especially the industrial sector, in order to protect the public interest, but it was based on the personal endeavor and efforts of the supreme authorities in the MoCI in KRG. They have not issued a special law justifying their necessity, also not the formulas procedural implementation and only adapted to the law No.32 in 1986 titling (The law of buying and rental of public assets).

B. Lack of legal legislation to reducing the problem of unemployment caused by the demobilization huge number of workers and imposed the preconditions on the affiliates of the PS and tenant such projects, as not to be an additional burden on the KRG budget. This is as well as the absence of confidence of employees in public MI’s to work in the PS in KR. The public sector was providing them pensions or compensation in the event of exposure to accidents in the task performance, which is not available in the PS in the KR because of the shortcomings of the labor legislation.

C. The privatization has led to dispense of civil service of technical personnel in the areas that shifted from the public to the PS, such as dairy, weaving and cigarette manufactures, they still earn salaries from the KRG without any productivity or benefit from their experiences in the PS.

D. Despite the KRsˈ political orientation towards liberalization of markets and supporting the PS and privatization; lack of particular board for implementation of the privatization process for evaluation of the machineries, determining its value economically-socially-politically, and choosing the appropriate approach and investors, in addition to find the well treatment for surplus employees without happening the disguised unemployment as not to be an additional burden on the KRG budget.

E. The technology obsolescence of machineries and equipment in public MI’s, if it substituted for new technologies that will carry out the huge investment expenses equivalent or equal to installation of new MI’s. Therefore, the absorption of investors toward these manufactures are really difficult without concessional terms.

F. The MoCI that is implementing body for industrial privatization did not conduct the objective assessment for assets and machineries in public facilities that have been privatized in any way from the approaches of known privatization, and identify the policies and needed conditions to implement the process. Where to be this process is visualizations and syndrome with the KRsˈ economic, political and social situation to achieve its declared objectives.

G. The transparencies and announces are of the other most important affairs of privatization requirement, which the privatization process in KR has lacked them. Where they were some of the processes mentioned between the bilateral on the basis of non-objective (by patronage) and some time without advertising in the media. Some rental privatization based on a personal request made by the tenant person based mainly on personal responsible knowledge, and that was the cause of weak popular support for this process in the KR.

H. The financial and humanitarian capabilities are limited in local PS, as well as the weakness of its technologies capabilities in the evolution and renewal of MI’s. In addition, the KRG has deal in particular with some companies in the PS and give it the priority and monopoly rights to some companies without other companies.

I. The privatization did not provide added-value and surplus revenue for KR, where KR could use in other sector useful for society while KR compensated for the loss in public ownership dating back originally to the society.

J. The orientation of PS in KR is toward the rapid profit, that it is the main factors has led to away on LSMI’s or the strategic MI’s which have an economic and social revenue on long-term for investors and the whole society, too.

K. Lack of stock market in KR which helps to provide the needed capital for large-scale investment as well as transferring some public MI’s for privatizing to private joint-stock company which could participated a wide base of citizens where could get a popular supporting for the privatization process. Despite the stock market of Baghdad did not have any effect, relation and corporation with KR.

L. Even after the appearance of negative impact on privatization experience in KR include-ing misconducting in the public properties also stopping and returning the contract of some MI’s which had privatized, the KRG did not take measures to find the alternatives to the approaches used for privatization. As well as KRG did not take measures to finding the solutions to the difficulties that accompanied them including unemployment and the huge financial burden, which the KRG's budget as been carrying out it.

M. The majority MI’s installed by FAO were SSMI’s did not have feasibility study while they have installed just for temporary social-economic target such as creating workforce opportunities, selling the raw material of some manufactures. In addition, to the openness with lack of protection for local MI’s have a negative impact on public MI’s resulting from their inabilities with foreign commodities in terms of prices and quality which led to stopping almost of them without stopping them expenditures, especially the wages and salaries.

In other side, that is right government gave many advantage for privatization and activation to the PS but until now there are some MI’s did not privatize and they rest without any production cause they lost them machineries and were been extinct without stopping them expenditures, especially the wages and salaries.

Reference: Dr. Razzaq Othman Mustafa, Developing Economy, Evaluation of Manufacturing Industrial and a model for industrial development for a case of Kurdistan Regon-Iraq, PhD Thesis, EHESS, Paris-France, 2014. PP 1-11.