PRIME MINISTER's ADVISORY COMMISSION

Private Sector Development Strategy of Iraq (PSDS - I) 2013 - 2130 January 2013

RePUBLIC OF IRAQ

PRIME MINISTER's ADVISORY COMMISSION

Private sector development strategy

of iraq

2013 - 2030

(DRAFT)

January 2013

TABLE of Contents

Executive summary
Introduction
VISION STATEMENT AND STRATEGIC OBJECTIVES
Part I: The PSD Strategy and Approach
1. / OVERVIEW OF THE IRAQI PRIVATE SECTOR: ISSUES AND CHALLENGES
1. / 1. / Opportunities for Development
1. / 2. / Structure and Performance of the Private Sector
1. / 3. / Private Sector Institutions and Associations
1. / 4. / The Iraqi UN Global Compact Local Network
1. / 5. / The Private Sector Development Centre
1. / 6. / Gender Equality and Participation in Economic Activities
1. / 7. / Constraints to Development
1. / 8. / Overarching Needs
2. / OVERVIEW OF MAIN ONGOING PRIVATE SECTOR DEVELOPMENT RELATED PROGRAMMES
2. / 1. / Main International Assistance
2. / 2. / National Assistance
3. / TARGET STAKEHOLDERS
4. / APPROACH TO THE IMPLEMENTATION OF THE PSD STRATEGY
Part II: Strategic Paths
5. / STRATEGY BASE AND TARGETS FOR THE VISION
5. / 1. / Strategic Basis
5. / 2. / Key Targets
6. / THE ROLES OF THE GOI, OF THE PRIVATE SECTOR AND OF THE INTERNATIONAL ORGANIZATIONS
6. / 1. / The Role of the GoI
6. / 2. / The Role of the Private Sector
6. / 3. / The Role of the International Organizations
7. / PILLARS OF THE PRIVATE SECTOR DEVELOPMENT STRATEGY
8. / STRATEGIC PATHS
Part III: Action Framework
9. / POLICY AND CROSS CUTTING AREAS FRAMEWORK: ISSUES AND STREAMLINING NEEDS
9. / 1. / The National Development Plans
9. / 2. / Key Policy and Cross Cutting Areas
9. / 2. / 1. / Key Economic Support Areas
9. / 2. / 1. / 1. / Economic Reform and Diversification
9. / 2. / 1. / 2. / Access to Finance
9. / 2. / 1. / 3. / Business Registration
9. / 2. / 1. / 4. / Land Reform
9. / 2. / 1. / 5. / SOEs Restructuring and Social Mitigation
9. / 2. / 1. / 6. / Public Private Partnerships
9. / 2. / 1. / 7. / SME Development and Support Infrastructures
9. / 2. / 1. / 8. / Investment
9. / 2. / 1. / 9. / Taxation and Customs
9. / 2. / 1. / 10. / Energy, Transportation and other Physical Infrastructures
9. / 2. / 1. / 11. / Quality Infrastructures and Standardization
9. / 2. / 2. / Sustainable Development Areas
9. / 2. / 2. / 1. / Labour Conditions
9. / 2. / 2. / 2. / Gender Equality
9. / 2. / 2. / 3. / Poverty Alleviation
9. / 2. / 2. / 4. / Education and Human Resources Development
9. / 2. / 2. / 5. / Health
9. / 2. / 2. / 6. / Environment
9. / 2. / 2. / 7. / Corporate Social Responsibility and Inclusiveness
9. / 3. / Streamlining, Prioritizing and Accelerating the Reform Agenda
10. / TARGET ECONOMIC DEVELOPMENT SECTORS
10. / 1. / Key Target Sectors for Economic and Social Growth
10. / 2. / Overview of PSD Potential in Target Economic Sectors
10. / 2. / 1. / Industry and Minerals
10. / 2. / 2. / Construction and Housing
10. / 2. / 3. / Agriculture and Food Processing
10. / 2. / 4. / Telecommunications and Information Technology
10. / 2. / 5. / Tourism
10. / 3. / Key Drivers
10. / 4. / GoI’s Approach to Direct Support to the Private Sector
10. / 4. / 1. / Management and Strategic Approach
10. / 4. / 2. / Targeted Financial Support for Small - Medium Businesses
10. / 4. / 3. / Eligibility Criteria for GoI Technical Assistance and Financial Support
Part IV: Governance, Implementation and Monitoring and Evaluation
11. / GOVERNANCE SYSTEM
11. / 1. / Basic Principles
11. / 2. / Envisaged Institutional Set Up
11. / 2. / 1. /

The Private Sector Development Council

11. / 2. / 2. /

The Task Force of Economic Reform (TFER)

11. / 2. / 3. /

The Technical Committees

12. / OVERALL IMPACT AND RESULTS
13. / INTERVENTION AND IMPLEMENTATION FRAMEWORK
13. / 1. / The Pillars Framework
13. / 2. / Implementation Framework
13. / 2. / 1. / Endorsement of the PSD Strategy
13. / 2. / 2. / Transitional Management
13. / 2. / 3. / PSD Council Management
13. / 2. / 4. / Dissemination and Communication
14. / Monitoring and Evaluation system
14. / 1. / Functions and Responsibilities
14. / 2. / Appropriateness of the PSD Strategy
14. / 3. / Effectiveness of the PSD Strategy
14. / 4. / Efficiency of Implementing the PSD Strategy

EXECUTIVE SUMMARY

ES 1.Decades of instability, devastating wars and sanctions that have marked Iraq's politics prior to 2003 as well as the long standing centralized economy and State reliance on oil exports for public revenues in the absence of other reliable budget sources have pushed the country into a resource curse and have suppressed the private sector. Most of the over 33,000 national MSMEs operating in Iraq until the late1990s have closed down due to cheap imports competition andinsecurity. Despite the increasing demand that the 3% annual demographic growth rate brings along, market shares of the national productive private sector have remained insignificant due to high production costs stemming from poor infrastructure,old technology and insufficiently skilled labor. All this led to debilitated private sector that has little role or presence, and lacks incentives for expansion and development.

ES 2.Over the last 5 years, the GoI, with the assistance of the international community has made some steps in improving the enabling environment for private enterprise development and to restore competitiveness of local production. Social dialog between the GoI and the Private Sector has been initiatedon employment and poverty reduction. The industrial strategy is in the final stage of preparation and massive funding for agriculture has been made available annually within the framework of the Agricultural Initiative. Also, the corporatization of SOEs initiated in 2011 will contribute to the withdrawal of State subsidies and to fair competition in the market, allowing for a gradual replacement of the State monopoly with competitively operating private companies.

ES 3.The Private Sector in Iraq is still suffering from a set of problems and impediments to its development including, but not limited to, inappropriate legislative and regulatory framework and lack of enforcement of the existing framework, the GoI's / Public Sector vision and unfair competition to the Private Sector,incompetent financial instruments, absence of efficient and permanent GoI / Public Sector - Private Sector dialogue and consultation platform and governance system, absence of policies and strategies, non-transparent public procurement system,suboptimal capacity, knowledge and organisation of the Private Sector, inefficient infrastructure and energy supply, complicated entry and exit processes andlack of skilled labor. The impact of this situation has been lack of economic diversification, insignificant contribution of the Private Sector to the GDP and, hence, contribution to the employment and job creation.

ES 4.The Private Sector in Iraq is dominated by small and very small businesses, mainly operating in retail and trade, construction and transportation services as well as in light industry. The majority of businesses are owned by sole proprietors, with most of the remainder being family partnerships[1]. Many of the employees in small and medium enterprises (SME) are unskilled, short-term laborers. Iraq only possesses a handful of large, typically family-run multi-industry conglomerates, active in retail, domestic trade and construction. However, large private businessesare emerging in Iraq in ICT, particularly mobile communications, and in technical services for oil and gas industry.

ES 5.In spite of all this, there is tremendous potential for the Private Sector development and engagement in Iraq's economy and development. Article 25 of the Constitution stipulates that "the State shall guarantee the reform of the Iraqi economy in accordance with modern economic principles to ensure the full investment of its resources, diversification of its sources, and the encouragement and development of the private sector". In this context, the GoI have expressed continuous commitment and initiated a set of interventions to contribute to the revitalization of the Private Sector with the support of the international community. Yet, little have been achieved until now and Iraq is still a long way from having an economically, socially and environmentally viable Private Sector system that contributes to economic diversification, sustainable development and poverty alleviation.

Scope, Roles and Management

ES 6.The Private Sector Development Strategy (PSD Strategy) of Iraq is the result of a joint cooperation and consultation among the GoI, the Iraqi Private Sector and the UN Agencies that have participated to the implementation of the Private Sector Development Programme for Iraq (PSDP-I) in the period 2009-2012, with contributions also by other international organizations, particularly the World Bank, USAID, Istanbul International Center for Private Sector in Development(IICPSD) and the dedicated sub-group of the Iraq Partners Forum).

ES 7.The PSD Strategy of Iraq encompasses the policy vision for economic diversification and the programmatic interventions for and by the Private Sector that are conducive to Iraq’s economic growth, poverty alleviation, human development aspirations, peace and stability. It will serve also the purpose of repositioning Iraq among the leading regional economies and for its effective integration in global value chains contributing to the consolidation of the country's image and market rating and leveraging its natural resources' contribution to long lasting growth, democracy and shared prosperity.

ES 8.The PSD Strategy builds on existing institutional arrangements,recent structural reform gains,assessed and shared concerns,policy orientations, ongoing efforts by all actors, particularlyGoI, national and international organizations as well as onthe existing opportunities. As such, it will basically continue the process of reforms initiated in the last years and that will need now to be further consolidated and accelerated with the commitment of all concerned parties. Moreover, it will provide inputs and references to the new National Development Plan 2013 - 2017, ensuring the needed consistency, synergy and coherence with national interventions in other sectors.For coherence and optimal utilization of resources, it is expected that the GoI will secure convergence of objectives and targets between the PSD strategy and the 5- year National Development Plan (2013-2017) as complemented by multi-year budget strategies.

ES 9.A sound private sector is a performance criterion for good governance. And while the GoI will initially lead the implementation of Iraq’s PSD Strategy in close consultation and in coordination with the Private Sector, the GoI shall gradually shift from the current role of planner, organizer, capital owner, business administrator, investor, producer and employer to the one of enabler, promoter and guarantor of market freedom.In particular, the GoI will aim, in the coming years, to improve Iraq's Doing Business position from the very low ranks of recent years.

ES 10.In parallel, the Private Sector will need to better organize itself and take a proactive role, to gradually take responsibility for managing, at later stage, some key components of the PSD Strategy. There will be also an important role of the international organizations that are expected to coordinate their agendas for assisting Iraq economic and social development, as well as to provide technical assistance and capacity development as appropriate and as needed, for contributing to an efficient roll out the interventions.

ES 11.The management of the PSD Strategy and the implementation of the planned measures and actions will depend on the establishment (with possible international advisory assistance), of an efficient and proactive governance system, as the key platform for GoI / Public Sector - Private Sector dialogue, monitoring and evaluation and for taking joint decisions, in particular, the formation of a Private Sector Development Council under the authority of the Economic Committee of the Council of Ministersand with the participation of key public and private players and other stakeholders. The PSD Council will be supported by the Task Force of Economic Reform of the Prime Minister Advisory Commission with an important coordination, advisory, monitoring and reporting role.

The PSD Strategy Process and Roll OutSystem

ES 12.The PSD Strategy process will be dynamic, willundergoannual reviews and progress assessments to ensure consistency with the overall national development vision and goals, inclusive market, private sector-led poverty reduction and achievement of MDGs.

ES 13.The PSD Strategy lies on four Pillars:

Pillar 1: Developing and enhancing the private sector knowledge and institutional competence base of Iraq

Pillar 2: Establishing a stable and conducive framework and domestic market conditions fostering the creation and growth of the Private Sector

Pillar 3: Building a core of competitive, sustainable and inclusive private sector clusters and value chains

Pillars 4: Establishing an efficient governance system supporting the other pillars.

ES 14.Each pillar has series of strategic objectives, paths and specific targets that ultimately define the action framework of the PSD Strategy for achieving the 2030 Vision's macro-objectives. There are obvious and stringent complementarities and synergies among the four pillars that will support each other.

ES 15.Pillar I

1. Enhancement of the knowledge on the development potential of the private sector of Iraq through extended surveys at national level, development of a an efficient decentralized business registration system, development of a national and governorate - level information system on private sector dynamics, formulation of sector strategies.
2. Strengthening the Private Sector institutional framework through improved governance system, ICT systems, enhanced capacity and skills for formulation of strategies and participation to the roll out of the Strategy.

ES 16.Pillar II

1. Easy and transparent access to finance for businesses; access to finance is considered as a first priority area for leveraging reforms also in other areas. The work will focus on needed policy and regulatory frameworks especially for SME financing, the establishment of a system of targeted Competitiveness Funds with possible matching with commercial lending and enhanced capacity of private banks.
2. Establishment of a comprehensive and harmonized framework of policies and strategies in all PSD areas through review, integration and expansion of the work already initiated in key policy areas and addressing also implementation and enforcement mechanisms and instruments.
3. Expansion of ICT networks and systems throughout the country, to enable full access by registered businesses to consent them to undertake researches, identify opportunities and networking in all their business development areas.

ES 17.Pillar III

1. Establishment of an SME Agency and Private Sector Support Infrastructures through the formulation and adoption of the relevant policy, legislative and regulatory framework for an Agency system (with branches in the governorates and the participation of private banks), inclusive of a specific SME financing policy and regulatory framework for channeling GoI resources and incentives, and supporting the establishments of clusters and value chains through the development of networks of private sector infrastructures (Business Development Services and Centers, Incubators, Industrial Zones and others).
2. Integration of State Owned Enterprises initiated in 2010 with the Private Sector reform processes where the private sector is expected to play a pivotal role, conducive to the SOEs restructuring.
3. Competitiveness and innovation enhancement though further tailoring and adoption of sector strategies prepared under Pillar 1, improved and effective strategic and business planning for the establishment of clusters and value chains (through the support of the SME Agency and PS Support Infrastructures), strategic partnerships and cooperation with national and international educational and academic institutions.

ES 18.Pillar IV

1. Full, efficient and effective implementation of the PSD Strategy through the establishment of simplegovernance structure, the participation of subnational authorities and institutions, including the private sector and the banking system, clear rules and decision making procedures, gradual transfer of management tasks (Pillars 1 and 3) to the private sector and an efficient monitoring and evaluation system
2. Increasing the effectiveness of international development assistance though coordinated and relevant agendas, regular consultations with the PSD Council and joint M&E.

ES 19.The PSD Strategy consequently addresses two groups of interventions:

Cross cutting policy areas (measures); and

Direct Support to the Private Sector (actions).

Measures in Policy and Cross Cutting Areas

ES 20.Besides access to finance, SME development, infrastructure upgrading, SOE restructuring and social mitigation, constituting per se priority strategic objectives under Pillars 2 and 3, the following other areas will be addressed under Pillar 2 (objective 2).

ES 21.Key Economic Support[2]

• Economic reform, for streamlining the overall national reform process, building on the work (draft legislation) developed so far.
• Business registration, for establishing a modern and decentralized system and contribute, along with incentives, to the gradual transformation of the informal sector, featuring a great part of the Iraqi economy
• Land reform, for creating and adopting a National Land Policy aimed at eliminating a series of barriers (for the private sector and more in general for investors), with focus on needed institutional arrangements.
• Public Private Partnership, for establishing the urgently needed policy and legal framework (building on drafting efforts so far) and learning from experiences under way.
• Investment, with focus especially on further streamlining the legislative and regulatory framework, to align it with international best practices on updating and expanding Iraq’s Investment Map prepared under the PSDP-I.
• Taxation and Customs, The GoI is committed to reforming the taxation system, ensuring the diversification of taxes and enforcement,not only to improve the competition capacity of the private sector but also to reduce informality and to create a stable and effective source of public revenues that will contribute to reducing dependability on oil resources, to finance public expenses and to achieve social justice and economic prosperity. This will be achieved by the adoption of the Tax System Reform Road Map and the actual initiation of the taxation system reform process.
• Energy, Transportation and other physical infrastructures. Inadequate supply of electricity is still a critical concern, impacting on daily life despite some recent improvements. The recently approved National Energy Strategy (INESTA) provides an excellent reference framework for the energy intensive industry, but not only. Specific measures will need to be taken also in the transport and other Infrastructures sectors, targeting target not only physical facilities but also processes and services, like cargo handling, customs, trucking sector structure, competition, and regulations.
• Quality Infrastructures and standardization, for developing a national system of policy, legislations and regulations, standardization and infrastructures to enhance the trade capacities and performance in Iraq, fostering integration into the regional and multilateral trading system.

ES 22.Sustainable Development

• Labor, a fundamental area for Iraqi businesses and people;better skills means better productivity.The proposed modern Labor Code will ensure affordablelabor cost and an emerging competitive advantage while taking into account recommendations and concerns expressed by international organizations on various matters (freedom of association, elimination of forced labor, children labor, discrimination, right of employers etc); a more balanced system needs, moreover, to be addressed between Iraqi workers and the increasing number of foreign workers. Improving the supply of quality productive local labour will eventually contribute to reducing dependence of foreign labour.
• Gender equality currently addressed by joint efforts of the GoI and UN agencies to implement the comprehensive framework to promote gender equality through proper commitments by the Private Sector and a combination of legal reforms, governmental policies and support programs, and civil society capacity building.
• Poverty alleviation, by implementing the National Strategy for Poverty Reduction prepared with the support of the World Bank and adopted by the GoI in 2009 where also the private sector is expected to play a key role.
• Education and Human Resources Development, implementing the recently launched National Education Strategy, prepared with the support of the World Bank, UNICEF and UNESCO, addressing the differences and aiming at developing human and institutional resources and designing and implement system reforms.In particular, stricter links and coordination between the private sector, educational, training and academic institutions will be carefully addressed, also as a mean to enhance competitiveness and inclusiveness.
• Environment, as addressed by the National Report on Sustainable Development and the NDP for the strict links with development and highlighting the political will and progresses made to improve environmental protection in the past years, also through improved legislation; proper procedures (such as the polluter pays principle) and incentives for less polluting businesses will need to be addressed and introduced.
• Corporate Social Responsibility (CSR) and Inclusiveness,shallbe adopted and promoted, building on the work of the UN Global Compact[3] and relevant commitments by PMAC for enhancing the role and engagement of the Private Sector on a voluntary but socially responsible basis.

Direct Support in Key Target Economic Sectors