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By Hassan Hafidh

By STEVEN LEE MYERS Published: September 27, 2009

BAQUBA, Iraq — The Diyala State Company for Electrical Industries here staggers along, making transformers, spark plugs, ceiling fans and steam irons that few want or can afford anymore.

Its labor force has tripled in size, even as production has slumped. A deal to lure $60 million in foreign capital — one of only a handful of foreign investments in Iraq’s state-owned industries — collapsed. The American government recently gave the company $2.5 million to keep its main production line operating and its workers out of penury and, perhaps, insurgency.

Next month the United States and Iraq will gather hundreds of officials and company executives for a two-day conference in Washington intended to send a message that after six years of war, Iraq is open for business, and not just in oil. Now more than ever before, Iraqi officials boast that a trickle of foreign investment — including the first new hotel in Baghdad since Saddam Hussein’s government fell — is at last poised to be a flood.

The experience of the company here, though, shows that economic development and foreign investment face more obstacles than security alone.

The state-owned industries that dominate the country’s economy — from oil fields to dairies to textile factories — are as bloated and inefficient as they were in Mr. Hussein’s time, arguably more so. They are hobbled by corruption, still sporadic electricity and poor roads and bound by bureaucracy and central planning that leave them unable to compete with a flood of cheap imports from Iran, Turkey and beyond.

New legislation intended to regulate investments, land rights, taxes, financial services and consumer protections remains stalled in Parliament. The mere mention of the sort of privatization that swept Eastern Europe and the former Soviet Union after the collapse of Communism is anathema to officials here.

“We are not after shock therapy,” Sami al-Araji, the chairman of Iraq’s national investment commission, said in an interview.

“We are after a gradual change from a centrally controlled economy to an open one.”

Prime Minister Nuri Kamal al-Maliki publicly pressed Vice President Joseph R. Biden Jr. earlier this month about “the need for this conference to be a success.”

Privately, though, American officials express concern that it will be little more than a political exercise before Mr. Maliki’s re-election campaign unless the Iraqis do more to create a solid foundation for foreign investors willing to take a risk on the country’s prospects.

Mr. Biden, in his meetings with Mr. Maliki and other senior leaders, stressed the need for better regulatory and financial systems, according to a senior official traveling with him. The official said that reforms would, for example, allow the Overseas Private Investment Corporation to extend loan guarantees to American companies interested in investing in Iraq.

Few, though, expect the legislation to proceed before next year’s parliamentary elections and the inevitable political bargaining that will follow, putting off significant reforms, and thus investment, for at least a year.

“Capital is cowardly,” said Mejul Mahdi Ali, the president of Diyala’s newly created investment commission. “It is always looking for a safe place.”

As he spoke, an explosion reverberated through Baquba; a roadside bomb killed three police officers.

Mr. Ali complained that many government ministers showed little interest in foreign or private investment, or actively opposed it. The commission was kicked out of two government offices before moving to a shabby villa, equipped not by the provincial government, but the American reconstruction team at Forward Operating Base Warhorse, which is nearby. He has not been paid in three months, he said.

The provincial government’s idea of economic development, he said, is a plan to buy 10,000 taxis and lease them to drivers, against his advice. Baquba might soon be the easiest place in the world to catch a cab, but he said, “That’s not investment.”

Still, even with uncertain security and insufficient legal protections, Iraq has started attracting the attention of investors.

Daimler AG signed an agreement with Iraq last year and opened an office in Baghdad. Case New Holland, the international tractor maker, began building the first of 1,250 tractors for the Iraqi government at a factory in Iskandariya, once a center of the insurgency in an area south of Baghdad known as the “triangle of death.”

Workers broke ground in July on a high-end $100 million hotel near the “crossed swords” monument in Baghdad’s international zone.

“Potential investors have a virtual open landscape to develop projects that will fill the needs of Iraq’s expanding and demanding population,” Dr. Araji of the national investment commission wrote in an investors guide published this year.

Optimism has been premature before.

The Ministry of Industry last year solicited bids for more than 40 projects involving partnerships with state-owned enterprises, but received them for only 11. Most of those have since failed to come to fruition, including the $60 million proposal for the electrical company here in Baquba.

The plant, with eight separate factories, was originally built in 1982 and equipped with machines by Mitsubishi that are now out of date. They still function only because workers have cannibalized parts.

When the war in Diyala was at its worst in 2007, the company shut down; the Islamic Army of Iraq, one of the leading insurgent factions, established its headquarters nearby. The director, Abdul Wadoud al-Sattar Mahmoud, went into hiding; his personal assistant was killed.

The violence ultimately eased, and the factory began to operate again, though largely with the help of the American reconstruction team at Warhorse and the Task Force for Business Stability Operations, a Pentagon agency that supports economic development in Iraq. The task force’s function has been to restore production at Iraq’s state-owned enterprises, after American officials initially sought to shut them immediately after the invasion in 2003.

A report by the task force in 2007 criticized the factory’s management and described the factory’s “most insidious” problem as “a general lack of industriousness.”

Government policies have not helped make it profitable either.

The Ministry of Industry has vastly expanded its payroll to 3,400 workers, compared with 1,200 after the invasion, and raised salaries, driving up the costs of its products. At the same time, a decision by the Coalition Provisional Authority to lower customs duties has meant cheaper foreign products. The factory now has 12,000 unsold ceiling fans and one million spark plugs stored in its warehouses.

Mr. Mahmoud said that while one ministry drove up costs, another, the Ministry of Electricity, complained that it could buy cheaper transformers from abroad. “The competition here is very difficult for me,” he said.

Iraqi law forbids foreign companies from owning equity in state-owned enterprises. The Ministry of Industry also forbids wholesale restructuring of companies that would require dismissing workers.

Even worse, in the case of the factory here, when the Ministry of Industry initialed the $60 million investment deal with an Egyptian-Iraqi consortium last year, it suspended its subsidies for the steel needed to make electrical transformers, potentially its most lucrative product in a country starved for power.

The consortium, however, pulled out of the deal earlier this year — because of the general international economic crisis, officials said — and the supply of steel necessary to keep production going dwindled. The production line would have ground to a halt if the Americans had not stepped in with the grant.

“We could produce more if we had raw materials,” the line’s manager, Abdul Salam Mohammed, said plaintively.

The director, Mr. Mahmoud, has begun to personally lobby provincial governments for business, deeply discounting the transformers and worsening the company’s losses, something he never had to do before.

“This is a new experience for us,” he said.

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