Video: Iraq Private Sector Development
Sean Jones
Director, Office of Economic Growth, USAID/Iraq
January 20, 2006
MODERATOR: Thank you for joining us. I'm happy to introduce Sean Jones who's the director of our Economic Growth Office out in Baghdad. Sean has been serving with us for the past seven months out in Baghdad, and we have a presentation of all the wonderful economic work and initiatives that we're undertaking under our office, that he will be presenting.
We would like to have a presentation for about 20 minutes, and leave about a half an hour for Q&A. Sean does have another appointment, so we'd like to be out of here, hopefully, no later than about 2:10 or so.
So without further introduction, Sean Jones.
MR. JONES: Hi, everybody. Can everybody hear me. I'm judging from the attendance, that I think there's going to be a lot of TDY-ers coming out to Baghdad very shortly to support our operations out there.
I've been out there, in Baghdad, for about nine months now, and what I would like to do is quickly run through the program, and then, as you have questions, I'll invite you to go ahead and pop your hand up but at the--I'll provide an opportunity of about a half hour at the end to ask any questions you might have.
But I do know, as I go into some of the details on the program, that there might be questions that just pop up in your head, that may be harder to go back to later. So I'll entertain questions as we go along and I'll provide a longer period of time after that to go into more detail.
Go ahead. Oh, I'm sorry. One back. Okay; sorry. Next one. Great.
The USAID-Iraq mission maintains several technical portfolios just like a standard mission. We have infrastructure, the health, education, Democracy and Governance Office, and then we have the Office of Economic Growth. We break up the Office of Economic Growth into basically three categories, very loosely defined.
One is economic governance, so taking care of the top level, the big P and the small p in policy. Strategy work, working--we work with--on the economic governance side, we work with about ten different ministries in Baghdad, as well as all of the governerets, and then the central bank of Iraq.
In the center we have the private sector development portfolio and of course I'm going to go into much more detail as we go in, and in the agriculture sector, revitalization is another, whole other section of our program as well.
You'll note some of the boxes that fall under the columns just kind of, are a few indicators of the things we're doing. It's by no means exhaustive. We have an extremely comprehensive complicated portfolio.
Going down the economic governance angle, we're installing financial management information system for the government to track its government expenditures. We're helping the government of Iraq with about 50 percent of its EPCO conditionalities. We are tackling subsidy reform.
Currently, subsidies make up about 50 percent of the government of Iraq's federal budget, so 15 of about a $30 billion budget goes directly to supporting the fuel that goes into their fuel tanks and the food basket they receive, supposedly every month.
Banking sector reform is another area we're working in. T8, technical assistance to ten ministries, and the central bank, monetary stability, so on and so forth. And we'll go into more detail.
Private sector development. We're focused on long-term job development, business registration, new business growth. We're primarily focusing on the micro, small and medium-sized enterprise area, or part of that, of the strata. We are working in technical areas such as trade capacity building and WTO accession, investment promotion agency, privatization, public-private partnerships, bringing in the Intels, the Microsofts, the Pepsi-Colas, to come in and start investing in Iraq. GDA type mechanisms. GDA and DCA.
And then the agriculture side, we're working on strategic orientation of the government, helping the ministry of agriculture and ministry of water resources simply understand what their role as a government institution is.
Policy reform. Agribusiness development. Technology and information sharing. Basic infrastructure development, clearing canals, repairing tractors, and then of course the public-private partnerships as well.
And our primary goals in that area are down in the red block there. To develop a market-based economy and to develop jobs that are within the private sector, and then of course transparency and accountability. Go ahead.
This is just a quick breakout of really rough numbers of how much money we have targeted for the three areas of our portfolio. These are not fully funded of course, unfortunately.
In the private sector development, we are funded at about $90 million of the 155. The economic governance is funded at about, I think it's 100 million out of the 185, and then agriculture is almost fully funded at 101 out of 106.
What that means is it's very difficult to plan and you'll see that as I discuss the individual pieces of the portfolio. Go ahead.
I want to briefly break out the way that the embassy looks at development in Iraq. Embassy and I would say Washington. Security is the underlying theme throughout the entire U.S. program in Iraq. The first stage, you'll see the first stage, 2003 to 2006, is what we informally call stage one--restore the basic services, give people an opportunity to walk to work safely, to get water and electricity at a reasonable rate or at least at a reasonable consistency.
Create basic economic opportunities, most often through short-term economic opportunities. Provide basic social services and essential services.
The next phase is what we call stage two, and that's where we're really moving into right now, and for any of you who have had an opportunity to review the new USAID strategy, it really fundamentally lays these out within three or four SOs, depending on which version of the strategy you're reading.
Build and sustain systems is essentially what we're looking at. Defeat the insurgency through development and military interventions.
Long-term employment. Of course that's my portfolio. Local governance through our democracy and governance portfolio. Public sector capacity building through a public sector capacity building SO or team, and then private sector development also with my team.
And then the last piece is as we transition out of an unstable environment and much more into what we would see as a typical AID environment. Next.
I'll start first with our economic governance portfolio. It's implemented by the Bearing Point Corporation and they manage all of our economic, or the bulk of our economic governance interventions in Baghdad and throughout Iraq.
As it says, there is a $185 million contract, partially funded. We have enough funds, right now, to go out through the middle of this year. Hopefully we'll receive more. If not, that'll close up, we'll find a follow-on alternative.
Some of the things we're working on, and this is one I'll go into a little bit of detail.
I'm going to concentrate on the left-hand side of the slide here.
Completion of the emergency post-conflict agreement with the IMF. That has actually been achieved, and now we're in the IMF standby arrangement phase, where the IMF provides a list of conditions that the government of Iraq must meet, and if they don't, they lose their line of credit as well as the opportunity for substantial--we're talking tens of billions of dollars in sovereign debt relief.
So that is a "big carrot" for the Iraqis to make a lot of the changes that they need to make in order to become much more reform-oriented.
And the USAID team in Iraq is assisting with about 50 percent of the conditionalities. The Iraqis, probably on their own, are taking charge of about 20 to 30 percent, and then the mix of other donors, and other parts of the U.S. Government are taking care of that other 20 percent.
So the idea--they include things like subsidy reform, like creating other ways to raise revenue, to creating laws and institutions that will facilitate the non-oil economy. Defeating corruption. Anti-terrorism funding. Things like that. Monetary data, for instance, is very difficult to gather, and we have a whole team of individuals just dedicated to building capacity to develop monetary data at the central bank and at the ministry of finance.
The next line, banking sector reform. We have a whole team of individuals who have been in Baghdad, in the banks, the public sector banks, on a daily basis, to restate the public sector banking system financials.
You can believe, because we're AID, you can believe the difficulty of walking into a state-owned bank, after 20 to 30 years of neglect and inappropriate accounting, and all of that, and trying to restate that.
And what we've done is we've been able to do that in seven, all seven of the government's state-owned banks, and what we've done with that data is we've then done a "quick and dirty" analysis of the condition of the entire banking system, and then provided the policy makers with the options that they have in order to restructure the entire banking sector.
Now, unfortunately, and one of the things I'll get to later is, we were in a temporary government situation for essentially the past two and a half years, and that does not inspire the temporary government leaders to make very difficult decisions.
So we're now at a point where the old government understood what some of the options are and they understand the difficulty of making the decision to restructure the entire banking sector and to write off billions and billions and billions of dollars of debt.
But at the same time, there are very few individuals who are willing to sign on the dotted line and start that process.
Transparent and timely budget execution. We have been working within the ministry of finance. Again, we have a whole team that goes in there, on average, three to four times a week, and you'll forgive me for saying that we think that's a lot, given the security environment.
But we have teams that have been going into the ministry of finance to install what's called a Financial Management Information System, that essentially, that the numbers that are put into the government budget are then shared with the entire government. Everybody who logs on, takes money, reports back on the spending of money, sees what and who the money's being spent on, and for whom.
It's a huge step in countering fraud and corruption within the public budget system.
Now what we're contemplating right now, depending on resources, is as I put it, you can--the FMIS, the Financial Management Information System is fantastic, if you trust the numbers that you're putting into the system.
So now we have to work on that side of it, is follow up on a different program that was helping to develop the Iraqi government budget system, and for us to come in and follow up with that and to create what I would--we're looking at the Canadian and maybe the British system of budget process development, and sharing that with the Iraqis, and the Iraqis seem to be most comfortable with the British system because many of their leading diplomats and ministers have come in from Europe after the war. So they all seem to be rather comfortable with the British system, which is what we're going, potentially going in that direction.
Rationalized social safety nets. What that means is we break our social safety net work up into two pieces. One is welfare reform and the other is reform of the pension system. On the welfare reform, we have just had a major success in getting the government of Iraq to adopt what is essentially a sweeping reform of the program. The benefits that were provided previous to December of 05 were constant, they were flatlined, regardless of the size of your family.
There was not enough money to fund the number of applicants. The number of applicants waiting for benefits was about three or four times the number of individuals actually receiving benefits.
We suspect with the reforms that have now been implemented as a result of USAID work, that up to a million beneficiaries will now receive benefits from the government of Iraq.
That will cover 25 percent of Iraq's population. One million beneficiaries times the average number of people in a household gives you a quarter of the population.
And those are all individuals that we've targeted at the dollar, or below, daily subsistence level.
On the pension side, we're working--just we're ramping up our work right now to bring in both the private and the public pension system into one system.
Better economic governance. That's kind of a catch-all for managing their economic policy much better than it has been. A lot of that work's being done at the ministry of finance as well as the central bank. Business registration system.
We're seeing, right now, an average of roughly 2000 new businesses per month, and that's based--after the war started, there were only 8000 private businesses registered in Iraq. There are now about 33,000.
We are assuming that a lot of those businesses are simply businesses moving from the informal economy into the formal economy, but we're also experiencing, anecdotally, a rise in just general private sector development.
I was talking with Jim Cunard [ph] just a couple hours ago, when I mentioned to him that if you just drive around--actually, if you fly over Baghdad at night, the whole city is lit up, despite x number of hours, say four or six hours a day that actually, people are supposedly receiving public electricity.
But the reason is is because people have gone out and replaced the government with private generators. You walk out--if you're driving down any street in Baghdad, you'll see huge massive generators in the middle of a park surrounded by a chain link fence and a couple guards, and then a bunch a wires going out from that. And that's entrepreneurship right there. And it's occurring in fuel it's occurring in water--every single area where you might see a shortage, the private sector is picking up the gap. Now I'm not saying they're going into the formal economy, even right away, or even in the future, but at least that entrepreneurship is occurring.
And the legal framework. About four or five months ago, we actually disassembled our legal. institutional reform team, pending the new government to come in, and we are now reassembling a commercial legal, institutional reform team, to be in place when the new government announces its list of priorities.
I'll note briefly, that one of the messages that's going to go out from embassy Baghdad, as soon as the new government take over, is the need to act on very difficult reforms within a certain period of time.
The new government will be coming in for a four year period. We believe that that first year is going to be so critical to making significant reforms, that after that period of time, people will be looking to be reelected again and they're not going to make difficult decisions that could potentially backfire. That first year period is so important, and USAID, our primary message is that we want to be ready for the demands of the new government on the donors.
It's unfortunate but yet fortunate, that we've been able to spend so much money, to date, but it would be extremely unfortunate if we were unable to meet the needs of the new government as it comes in, as this is the permanent government. The next.
Just a few of the starting points, talks about corruption, really, essentially a breakdown of the--or the nonexistence of the private sector, the inability of the government to meet the needs of the private sector.
Some of the accomplishments we've had to date, I've already spoken about several of them. The IMF conditionalities take a lot of our time, which is good, because it also adds that extra "carrot" of having tens of billions of dollars of debt relief, if they were able to achieve that.
And briefly, let me tell you what that means if they don't get that debt relief. It means that the Iraqis have to pay that, and that means that our military stays longer. That's the end result.
Substantial capacity building at the ten ministries. Maybe some of you have heard about new capacity building efforts that will be coming in online, potentially from the mission in Baghdad.
Our ministry of finance and central bank work, our public sector banking assessment, our 2000 participants, just in formal training over the past 12 months. So we're doing quite a bit, given very difficult circumstances. Next.
I'll move right into that second column which is private sector development. It's more than half funded, and it, as well as our economic governance program, will end midyear if new funding doesn't come online.
I'll briefly run down the left side of the page again.
WTO accession and trade capacity building remains one of the key ways for Iraq to achieve reform. I worked with a colleague, several years ago, who liked to call it "stealth reform." The objective, to us, and for the government of Iraq, is to achieve WTO accession.
The byproduct, and the very beneficial byproduct, is that it comes with a host of commercial, legal and institutional reforms that have to be accomplished prior to acceding to the WTO.
So we pushed the WTO angle, knowing that the Iraqis are also committing to 30 or 40, at least 30 or 40 major legal overhaul and institutional changes.
Iraqi privatization. We are pushing for a semiautonomous, or autonomous, privatization agency to manage all of the government of Iraq's private--or SOEs. There are roughly, depending on who you ask, there are roughly 300 state-owned enterprises in every single sector. They are the dominant force in the economy and most of them have locked their doors. Most of them have been gutted, they don't have machinery, they don't have access to spare parts, the government has suspended payments for their operational budget, and there are about a half a million employees who are still being paid to not work in those factories.
We need to do something. And at the same time, the private sector, another area that I'm engaged in, is the investment, the foreign investment coming into Iraq.
The foreign investors are very skeptical of the investment environment, in the absence of a privatization plan. If they think that the government is going to come in and dump billions of dollars into state-owned enterprises, well, then you're not going to get the Shells, the Exxons, the Intels, the Microsofts, the Pepsi-Colas and McDonalds to come in and invest their funds.
So getting this laid out, in almost a privatization road map, is critical for foreign investment as well.
Business skills training. We have done hundreds and hundreds of courses throughout the country. We've also helped individual business development service providers set up their operations throughout the country. A lot of it's been done in agriculture. A lot of it's been done in agribusiness, to a certain degree, every single other sector as well.
Modern accounting standards have-- international IAS standards, essentially, have been brought in only through USAID programs. Our adviser on accounting standards actually sent a letter to, I think every single Fortune 500 company, to request annual reports, and he got, I think it was something like 10,000 of them back, in boxes, sent to Baghdad, and he just sent those around to a bunch of different universities and centers around the country, and then followed those up with training courses.
And it's pretty amazing, the demand that has been placed on him now as a result of people wanting to move from maybe three or four sets of books to maybe one or two sets of books.
Increased access to credit. We are rolling out a very comprehensive MSME program, micro, small, and medium-sized enterprise development program. There are essentially--there are three or four parts to this.
One is USAID will be providing large and small grants to international NGOs and local organizations to start lending operations in Iraq, start or continue lending operations in Iraq.
At the same time, we are creating, helping the Iraqis create a loan guarantee corporation. We have interests from almost every single private bank of the twenty-three, almost every single private bank in Iraq to deposit at least $250,000 per private bank into the fund. USAID will be depositing roughly 8 or $9 million into that fund.
The IFC is talking about a 10- to $20 million investment as well.
So we're pulling that together right now. We're hoping that will be launched within the next month or so. And then we're also strengthening private bankers association, making it the mechanism for banking training throughout the country and making it the sustainable organization to represent the private bankers' interests.
Now all of those come together to try to link up--the way it originally came about was to try to link up, make sure the micro finance institutions that we're trying to build in Iraq, and the industry has access to commercial credit as opposed to the tens of millions of dollars that have been dumped into MFIs, to date, and to commercial banks, to date, in fact.
Iraq investment promotion agency. We have a team on the ground that has essentially set up an investment promotion agency. But you can imagine the types of things that this small little unit would be dealing with. Everything, from getting a potential investor from the airport to the office requires what we call a private security detail team of, you know, four to eight individuals with submachine guns in an armored SUV.
Everything from that to just knowing how to operate basic software on a computer. They are learning that now and, in fact, what is most amazing about it is that all of the people who have been hired, or who have volunteered from other ministries to work in this investment promotion agency are women. So we have about 25 women, the head, all the way down to the basic officers who manage, or case officers.
So a very exciting program. That's rolling out right now.
Throughout all of these areas, we are--or Izdihar. Izdihar is the name of the team that manages our private sector development work. Izdihar is also developing about 30--or has developed, with the Iraqis, about 30 new laws, ranging from phytosanitary standards to a new investment promotion law, to a company law, to whatever. So it's rather incredible. Go ahead.
These are the areas in which our private sector team is working. Out of all the areas identified by the embassy as areas that fall under the umbrella of private sector development, there are really only two that we're not working in in great detail.
With the Iraqis, we've helped write the leasing law, the new leasing law that was passed middle of last year. Since then, we haven't done very much. And in transportation, that's simply a behemoth that is burdened by corruption and cronyism and tribal politics. We're staying out of that right now. In fact the military kind of likes to work on that one themselves.
And all these other areas are things that we are working on.
I should mention also in private sector development the capital markets. I didn't mention that work. We work very closely with our embassy colleagues and we have been responsible for writing the rules and regulations, and strengthening some of the organizations and doing capacity building at the stock exchange securities commission, and the securities dealers association. Go ahead.
Again, just where we were. 86 percent, if you can believe it, 86 percent of bank lending prior to the war was to SOEs. Banks don't even know how to lend to a private company. We're doing things like cashflow-based lending courses, and in May of 2005, Iraq saw its first cashflow-based loan being made by a private bank to a private company.
Trade linkages didn't exist. SOEs were distorting the market. Policies and regulations and institutions were distorting the market. Government institutions see themselves as competitors in the market rather than regulators and overseers.
Accomplishments. Again, I've talked about a few of those. We actually drafted the original memorandum of foreign trade regime, which some of you may know is the first step in that WTO accession process,and after several iterations, running around with the Iraq government to perfect it and fine-tune it, the WTO came back and said it was the finest MFTR that they had ever received.
So I guess it's also the product of seeing a 100 plus other countries go through the same process. But we also have a very good team on the ground, on our trade team.
Our investment promotion agency and a trade information center has been set up. The TIC, in fact, has actually been modeled on the TIC that is inside the Ronald Reagan Building from the Department of Commerce.
The privatization law has been drafted. We're starting to develop prospectus, prospecti for SOEs, the largest state-owned enterprises in the country, so that private investors can get a sense of what's out there, what kind of assets exist, and what condition--what is the debt, and what are the general ratios for that particular SOE, if they choose to invest.
Privatization law has been drafted and, actually, just this week, a new set of regulations were announced to set up an autonomous privatization agency. Capital markets are being strengthened, accounting, lending practices are being strengthened as well throughout the private sector as well as the banking system. Next.
Our agriculture development, I'll talk a little less about. It's slowing--or it's not slowing down now, but at the end of this year it will have expanded its funds, and we're actually designing a follow-on program right now, geared more towards agribusiness development, and at the subregional level, and I'd rather talk more about that than some of the things that gone on.
That said, there are three primary areas under the existing agriculture program.
One is to increase the physical and technological information out there, and the physical and technological capacity of farmers to grow their products.
Institutional and organizational strengthening, helping cooperatives, helping agricultural-based associations, helping the ag extension officers learn their job out in the field as well.
And then that relates directly to the human resources. Working one on one with farmers. Working one on one in ag extension offices, giving them a computer, teaching them how to turn it on and send an e-mail; little things like that.
Also sharing information across different markets. Somebody in Suleymania, in the north, has no idea of the quantity or price of tomatoes down in the Basra region. At the same time--so what's happening is inside of Iraq, nobody knows what's going on. There's no talking.
What is happening is a lot of the domestic production--or I don't know the exact percentage but it's a good part of the domestic production of high-value crops, is actually going across the border, and at the same time Iran and Syria are importing their high-value crops.
So like I said to a group yesterday, I guess somebody's benefiting from that, if it's not the Iraqis.
Some of the end states that we're looking at is to develop a market where farmers and consumers, and producers, all have access to information, somehow. By the end of this year, we will have daily price, market price reports on five radio stations and TV stations. So that everybody in the country knows exactly how much a tomato in Basra is or a cucumber in Irbil costs, so that that trade, that intra Iraq trade can start occurring.
The working much more diligently with agribusinesses. Right now, a lot of our work with agribusinesses has been a lot of capacity building and training.
This is what you could be doing if you were using the following, X, Y and Z methodologies.
We do pilot plots all around the country to show agribusinesses and farmers how to increase efficiency, increase yield, those kinds of things.
Our next phase of the USAID-Iraq agriculture program will be dedicated almost entirely, at least 50 percent of the program will be focused no agribusinesses outside of Baghdad, i.e., not doing the policy stuff but actually working with individual producers, and companies that add value to agricultural crops.
Increasing cereal and high-value crop yields. Again, that's through technology and information sharing. Better water, for instance. Leveling off a piece of land as opposed to letting certain sections of it build up with water. You see a big problem with the current canal system and water strategy of Iraq, is that almost every single agricultural area now is--the soil is so--I don't know the technical word, you can tell I'm not a farmer--is full of saline, or the crop, or the soil is so laden with salt, that they can't grow anything, or they're actually having to shift from traditional Iraq crops that have been growing for hundreds of years into saline-resistant crops.
Working with the ministry of agriculture and the ministry of water resources to be enablers of private sector development in the market as opposed to competitors in the market. They honestly still do see themselves as competitors to, you know, the "mom and pop" farmers that only have one hectare of land. And that's quite unfortunate.
We're working with them also, the MOA and the MOWR, to develop strategies for the country, in particular, the ministry of water resources, to map out the canals that should stay open and the ones that should close, to understand the flow of water coming in from Turkey and Syria and Iran, and to make sure that the Kurdish region is not getting 80 percent of the good water and the rest is really garbage after it's filtered through all of the agricultural lands.
So working with them to develop that water resource model over the next few years is very important.
And then to--again, the ministry of agriculture strategy is essentially going to be how to get the ministry of agriculture out of the business of farming and agribusiness and value-added production.
And instant and widespread access. I mentioned that the radio stations, television stations, something that's been quite successful in many other parts of the world as well, is using SMS, instant messaging on your cell phones.
It was funny, in a document that went up to the Hill, to kind of--we send up documents every other day, to explain certain parts of our program, and one of the documents that went up to the Hill said something to the effect that using SMS to share information between farmers, and it was laughed at, and that was very unfortunate, but that small little thing would give you an understanding of the kind of uphill battle it is to explain the development worthiness of almost every single angle of our program.
Many are intuitive, some are not so intuitive, and it's very difficult with a staff of sometimes three on the ground or a staff of ten on the ground, regardless of the size of the staff, it's very difficult sometimes to make sure that everybody who has an interest in Iraq, and I'll be the first to say it's quite a few people who have an interest in Iraq, and like to have their hands in it--make sure they understand the program and make sure they have an equal opportunity to ask the questions they need to understand the type of work that USAID's doing there. So next.
Again the starting point, and you'll see on the right-hand top is a photo of me leaning out of a helicopter. That's actually how we see much of the agricultural land in Iraq.
The starting point, of course it's kind of what I've already said, low yields, lack of access to information, basically no understanding of the most modern technology and crop production methods.
No strategies at the ministry of water resources, no vision. Despite them saying we are--actually, the minister of agriculture told me I'm a private sector person, I know exactly the way the private sector works. I've worked for the ministry of interior for 20 years, which is their Secret Service. And then years of, decades of distortions, through policy and institutional issues that exist on the ground.
I've given here a list of accomplishments throughout the program and this is just, these are the ones that we've accomplished. There are so many things.
As you know agriculture takes a little bit longer than some of the other things that USAID does in the field. We have so many benchmark achievements that are occurring within our objectives and those actually are very difficult to explain to stakeholders, the fact that increasing production by 30 percent on a pilot piece of land, that 1000 farmers visited, is actually an accomplishment. Well, it is, especially if they go back and they actually start using those methodologies. Next.
Again, this is just a quick run-through of the three programs we have right now. We're in the phase with the new strategic objectives of designing new programs based on various eventualities, funding eventualities. Next.
I'm going to talk briefly about some of the issues that we face in Iraq that are different than other places. One is funding constraints.
We often find out about our level of funding about three months before the program is going to shut down. It's unfortunate, it's also--it's not the way that USAID does its typical work, so it's difficult for USAID to respond and be as flexible as we need to be to respond, to work in an environment like this.
I know that many, many people in Washington, and in the field, understand development but, at the same time, they have to deal with the political realities in Washington, of having to deal with funding priorities in a particular challenging environment and a year of natural disasters that have taken other funding sources that our programs might have otherwise gotten.
In fact USAID's overall development program might have gotten. Temporary nature of the government, to date, has been an extremely difficult hurdle to tackle. There is a serious unwillingness to make difficult decisions and to make the necessary reforms that have to occur in order for the Iraqi people to start benefiting from the regime change.
Economic issues have not, until recently, been at the forefront of the embassy's agenda because we've been trying to set up a government and help write a constitution.
USAID continues to fill in, quote, unquote, or at least my team continues to fill in during the International Monetary Fund and The World Bank's absence from Iraq.
A lot of our work on the standby arrangement, the IMF standby arrangement, would otherwise be done by The World Bank.
We're having to reallocate resources on a daily basis to help Iraqis meet the needs of those IMF conditions.
Capacity of government of Iraq counterparts is growing slowly. It's growing but it's growing slowly, and in some cases, when you finally found that champion for a cause, that person is either removed or picked up from the private sector or moves to Jordan, or something.
So, again, finding those consistent linkages with the champions who are actually going to make things happen in Iraq has been very difficult. Their business skills development and vocational training. We currently don't have funding for follow-on. So there is very little business skills development and there is absolutely no vocational training occurring in Iraq right now.
The Iraqi population is very, very ignorant of--just like the former Soviet Union following the collapse of the wall. Just the same as in Iraq. There is very, very little understanding of how a private sector works, how the government should interact with its people, how the government should motivate, enable the private sector as opposed to compete with it.
The resources are constrained by mobility. Like I said earlier, getting out three or four times a week is considered a lot for us, and having an average, of each of those visits, of having two or three hours sitting with your counterpart is actually a very good week.
Many times, because of things happening, whether in Baghdad or other parts of the country, we sometimes stop all movement altogether.
That's just the contractor side. It's even more difficult for the USAID staff in Iraq.
We are much more restricted in terms of our movements out into what we call the Red Zone, as well as the rest of Iraq, than our contractors.
Our contractors, which is very different than working in other countries. Our contractors are often delivering the messages for us and getting information for us, that in a typical mission USAID officers would be out there doing that.
There are ways to compensate, a lot of virtual management. It's just definitely a very challenging environment.
And then the last piece is it's been very difficult to find Iraq, talented Iraqis to work on our programs, and again to develop counterpart relationships with, becase theuy lack the technical skills, and, most importantly, the perspective that international experts come in with. Next.
I'm going to spend literally ten seconds on this. This is where we're moving towards the future, is by no means set in stone. The programs and their priorities, and the types of components that would go into these is changing, almost on a weekly basis.
Dependent on conversations between State Department, Treasury Department, the Hill, the National Security Council. Everybody who is involved in Iraq has had a hand in developing the USAID assistance program in Iraq.
And for that reason, it just means that we have to be a little bit more flexible than we would in a normal country. When you design your programs two years in advance, you implement. Well, we're designing programs in advance, and they're changing as we're designing them, and actually, as they're being tendered even. Next.
I'll open it up to Q&A now. I probably went into a little bit more detail on some of those things, given that it's ten minutes to 2:00 now and I'd only planned on speaking twenty minutes. But I'll open it up to Q&A for anybody who has any more detailed questions.
Yes?
QUESTION: [off-mike] ask you about stage two. I didn't see anything up there about continuing reform [inaudible]. This is probably a "big deal" politically, domestically, [inaudible] from the standpoint of American taxpayers [inaudible] a place like Iraq, [inaudible] unhappy they would be. [inaudible] or that the job is mostly done, or you've done as much as you can politically?
MR. JONES: No. In fact we're just starting. We are the only implementor working on subsidy reform. The other donors are not working on that. And our efforts, as well as our embassy colleagues, to get the government to reduce subsidies on an annual basis is one of our annual priorities.
We lump it into our economic governance and building a more capable economic system.
QUESTION: [inaudible].
MR. JONES: Yes; we're still working on it.
QUESTION: [inaudible].
MR. JONES: No; we're still working on that. The--
QUESTION: How big [inaudible]?
MR. JONES: That I don't know, off the top of my head. It's 50 percent of the government's budget. I don't know what the--I actually don't know what the GDP for 2005 was. I haven't seen the figures yet.
It's 50 percent of the government spending, which is substantial, which means the military and interior--
MR. : [inaudible].
MR. JONES: Oh. Five zero. Yeah. 15 billion of the $30 billion Iraqi budget is dedicated to subsidies.
MR. : [inaudible].
MR. JONES: It's massive. Yeah; it's absolutely massive.
And we don't know--one of the ways that the government makes its money is not necessarily through tax collection, although it does that. It's through oil prices and it's very difficult to plan, given the pipeline disturbances as well as the jumping price of oil, and Iraqi oil doesn't get as much money as some of the to other forms of crude coming out of the area.
QUESTION: [inaudible]. I wanted to ask a question related to what degree we're moving the economy [inaudible]?
MR. JONES: That's right.
QUESTION: But also [inaudible]. So the question is are we considering what has been [inaudible]?
MR. JONES: Absolutely; yeah.
QUESTION: [inaudible].
MR. JONES: No. I wouldn't say that we're moving it radically towards the West. In fact I spend most of my time on building linkages between Kuwaiti or Saudi or Jordanian firms, experts, advisers, those--or systems, even, introducing systems that are within the region, that are considered, you know, oriented towards best practices, and bringing those in, rather than introducing only Western European and the American system.
And in terms of commercial, legal, institutional reform, which is where you see a lot--in some countries you see a lot of that, that Western flavor being introduced.
In as many cases as possible, we are simply amending old Ottoman or British or Iraqi laws as opposed to rewriting new ones.
That said, there is a lot of emphasis to, on some parts of our government, to completely orient the Iraqis towards that American angle.
The development people will tell you that's not always the best case, and so I appreciate that question.
Islamic lending. We are actually responding to minister of finance's request to help get Islamic lending institutions into Iraq, to start partnering with local Iraqi private banks, and so we--not that this is one of those Islamic lending institutions, but I've spent some period of time helping National Bank of Kuwait try to get their bank registered in Iraq. The National Bank of Jordan, several Saudi financial institutions that are trying to get in as well.
So we spend a lot of time doing that. You're absolutely right. I did mention the McDonalds and the Wendys and the, whatever, the Burger Kings. But that's not where my effort lies. We have a department across the street that works quite a bit on that kind of thing.
I'd much rather get that--as you call it--the south-south connections built.
Yes?
QUESTION: Glen Roderick [ph] with the Office of Economic Growth, here in Washington.
You mentioned that there's a noticeable lack of enthusiasm for reform and especially economic growth or economic policy reform, but you're expecting a surge of enthusiasm in the coming year. Why, and where is that going to come from, and what are you doing to help elicit that?
MR. JONES: I'm not sure I'm expecting it but I hope it's going to happen. As I said, I think that the message that's going to come out of the embassy, once the new government takes its seat, is that the Iraqis will have a window of opportunity that they need to capitalize on, to make very difficult decisions, that they can--over, during their four year term, that they can then watch come to fruition.
If they wait to make difficult decisions later on, they will not--they may not make those decisions because they'll be getting closer to the period when they'll actually be trying to get reelected. As we've just seen in the past seven months, very few difficult decisions were made simply because many of the people who needed to make those decisions were trying to be reelected, and cutting a pen--or changing a pension system or reannnouncing a plan to restructure the banks is not a very popular idea with, you know, 80 percent of the population.
QUESTION: Perhaps more specifically, you now see the elected officials. Is there a potential or even [inaudible] among those elected officials around these agendas?
MR. JONES: I believe so. The Shiaa party apparently was--Shiaa coalition was announced as the victors of the recent election. I think that was announced earlier today as that result was validated. What I believe is going to happen is because of the percentage by which they won, they're going to need to form a coalition government and the Sunnis--the America government can't stress enough how important it is to bring the Sunnis into the fold on the development of that coalition government.
To answer your question, we're not sure of the makeup of that government yet. It's okay to say that the Shiia party has won the majority but the coalition is what's going to determine the agenda, and I'm not sure that--we don't even know who the ministers are going to be and if recent history is any indicator, the ministers, not the parliament, are what ran the agenda in Iraq for at least the past year, year and a half.
We're going to be paying close attention to who the ministers are because those ministers are the champions for the reform efforts in various sectors.
It's a very wishy-washy answer to your question because I don't know what the makeup of the new government will be.
MR. : But Sean, I think it's also worth mentioning that a part of the Paris Club debt relief is contingent upon an uninterrupted standby agreement with the IMF for three years, and it's again worth noting that the SBA has specific targets for 2006, 2007, 2008, both at the broader macroeconomic policy level but also at, you know, private enterprise level as well.
So I mean they will have certain conditionalities that they will have to abide by, including subsidy reform, and I think including some of the issues on social safety net, that they'll have to hit. So I mean, they figure you've got the IMF checking up to make sure that the reform process continues.
MR. JONES And we've confirmed through a series of meetings this week, that there will be no wavering of the donor community and the international response to any kind of moves to move away from meeting the IMF requirements.
That is of the most critical importance, for the Iraqis to meet those objectives.
Hi.
QUESTION: Hi. [inaudible]. And I think you said there were 23 private banks, which seems like a lot to me, and, you know, I know you said [inaudible] 86 percent of the budget was going to SOEs. I was just wondering how that's changed, if you know, and also, how much lending [inaudible] doing and what percent of the balance sheets are made up of loans, and if they are lending, who they're lending to, because I'm sure most businesses [inaudible].
MR. JONES Yeah. Very--I mean, I indicated before, the first cashflow base loan was done in May. I think there have only been a dozen, since then, in all of Iraq. There is still very little lending going on. I don't believe--well, the loans have stopped, essentially, to the public sector and the private sector. Every time I go out on the street and I talk with entrepreneurs, they often talk about the micro finance, the availability of micro finance.
But I'm also talking to restaurateurs and hoteliers, and, and tourism operators for religion tourism, and they talk about not being able to get a 20- or $30,000 loan. So there's a huge missing middle.
I don't believe that the private sector or the public sector is responding to that need, and I don't know--there are 23 banks--I don't know--some of them are defunct, operationally and financially defunct. It just depends on which set of books they show you, and I think through a series of mergers, a series of close-downs, you will see a thriving banking sector in probably roughly two years, depending on what they do with the public sector banking system. Yeah.
QUESTION: [inaudible] media office, here, in Washington. As you work on decentralization, as you work in the regions, how do you prioritize? It seems you've got areas that are important. I mean, you've got areas that are feasible to work in. How does one handle that balance?
MR. JONES Great question, and it's something we try to tackle every month, and we don't always get a different answer but we still tackle it every month.
We are working in every single part of the country. We are having the most impact in the areas that are easier to move around in and that are not violence-prone. That's the term we use, the violence-prone areas.
As we move in to future programming, we need a formal policy decision that we will--that there will be attempts to engage the Sunnis to become part of the economic and the political system.
I believe we'll see a lot of focus on those areas, the Sunni Triangle area. Anbar, where a lot of the instability stems. We'll see a lot of engagement in that area. But then I think it's safe to say we'll also be doing quite a bit in the areas that have been traditionally permissive.
Baghdad is a traditionally permissive environment, despite all the bombings you hear about.
In the north, it's extremely permissive. You can literally go out, you know, in a lightly-armored vehicle, go to a restaurant, meet with a minister, meet with several businessmen, and the likelihood of something happening to you is, you know, one fraction of a percent of that likelihood in Baghdad.
So it depends on the area. One of the things we're also facing is how do we do our work in an environment in which we can only move around with the military's assistance?
Rolling up in front of a bakery, a micro finance recipient, with Hummers and two Apache helicopters over your head is not an option, but it has been done in the past, and it's extremely unfortunate. Sometimes people have been hurt because of those kinds of things, and so we have to temper how much we get involved on the ground, to what degree the monitoring and evaluation is particularly difficult in the absence of a secure environment. So we're, like I said, we reevaluate that almost on a monthly basis.
Hi.
QUESTION: Hi, Sean. Michael Joneson [inaudible] and you touched on [inaudible]?
MR. JONES We rely--and this is also unlike a traditional AID environment--we rely heavily on contractors only for data, and to that extent, roughly 450 to 500 of the 600 contractors under my office's supervision are Iraqis, and they're out there, and they're meeting with individuals, and they're a lot more under the radar than I am going out in a Hummer.
And their ability to get data has so far been, for the most part, very reliable, and we also have--we're experimenting in new ways of doing virtual monitoring and evaluation, and things that have worked in other places like Afghanistan, Sudan, and other places.
So there's some experimentation, there's a lot of reliance on contractors that we might, in other places, not rely on them so much.
And until the security situation gets better, that's really our course of action.
Maybe one more question.
Hi.
QUESTION: Bill Stefan [ph] from Office of Agriculture [inaudible]. In another meeting this morning, we were talking about the public distribution system [inaudible] and we noted that under the Coalition Provisional Authority [inaudible] U.S. government position was to defer these questions to a permanent Iraqi government.
You mentioned that there's a year-long window in which to enact major reforms.
I agree that this is a decision for the Iraqis to grapple with.
What overtures have we made to say we stand by to help you with the analysis or some of the phase-in, or social safety net programs or so forth, to make this a little more politically and socially palatable?
MR. JONES Well, the most amazing things that our recent success on the social safety net has done, and this is in particular reference to the welfare reform piece, is that the new social safety net provisions allow for an increase in your quarterly welfare payment as other benefits that the Iraqi government provides decreases.
So if fuel prices increase, your cash benefit increases. When PDS, which the public distribution system is Iraq's food subsidy program. Every family gets, supposedly gets once a month a basket of goods.
That is extremely inconsistent and fraught with corruption. Very, very expensive. Out of the $25 that is spent on each food basket, roughly only five of that dollars actually gets to the person.
So what the welfare reform piece of our social safety net reform package does is it has that flexibility of increasing cash benefits when other subsidy benefits are decreased.
I would envision, at some point, you would also see, when the electricity tariffs begin to rise--right now, it's practically free to get electricity. As those begin to rise, those will be added to the pool of benefits.
And that's been embraced by every parliamentarian and minister we've had interaction with.
MR. : You should also mention that there has been [inaudible].
MR. JONES We are seeing, we've just recently heard about two pilot monetization programs that are occurring in the north, and we're trying to find out more information about that, as well as David just mentioned that a very well-known minister just recently, on his own, ordered a batch of checks to be printed in Lebanon and he's essentially paying everybody who's not received their benefits for the past year, with a check, actually paper check, they go to the bank and they get their money.
That is a form of monetization. So the monetization and the PDS reform is extremely ad hoc. What the embassy is doing is we've pulled together, over the past two or three months, just pulled together our position, because I think if you talk to a food security person versus an agriculture person, versus a budget and finance or economic growth person, you're going to find various opinions coming out of that group that don't necessarily mesh.
And so the U.S. Government has had to pull together its resources to come to a common understanding of what we can then recommend to the new Iraqi government.
Well, thank you, everybody. I really appreciate your time and I appreciate your interest in Iraq. So thank you.
[Applause]
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