Global Policy Forum

By Philip Thornton and Andrew Gumbel

Iraq was in effect put up for sale yesterday when the American-appointed administration announced it was opening up all sectors of the economy to foreign investors in a desperate attempt to deliver much-needed reconstruction against a daily backdrop of kidnappings, looting and violent death.

In an unexpected move unveiled at the meeting in Dubai of the Group of Seven rich nations, the Iraqi Governing Council announced sweeping reforms to allow total foreign ownership without the need for prior approval. The initiative bore all the hallmarks of Washington's ascendant neoconservative lobby, complete with tax cuts and trade tariff rollbacks. It will apply to everything from industry to health and water, although not oil.

But it is still likely to feed concerns that Iraq is being turned into a golden opportunity for profiteering by multinational corporations relying on their political connections. Already, the biggest reconstruction contracts have been allocated to American firms such as Bechtel and Halliburton, which have ties to the Bush administration. They were selected behind closed doors, with no opportunity for competitors to present bids.

Iraq is far from an ideal environment for business, however, and the new initiative seemed calculated to overcome qualms overseas companies have had about the risks to both people and capital. It remains to be seen whether the prospect of buying into Iraq's most essential services, pricing those services at will and repatriating profits in their entirety will be a strong enough lure to offset the continuing inability of the US military to make the country secure from resistance fighters and heavily armed criminal gangs.

Wholesale privatisation is a dramatic departure from Saddam Hussein's centralised management of the Iraqi economy, which was reasonably successful in capitalising on the country's oil wealth to build modern hospitals, schools and other infrastructure, at least until the upheavals of the 1980-88 Iran-Iraq war, the 1991 Gulf War and the imposition of United Nations sanctions after that conflict. One Arab expert said: "There's a fear that privatisation of too many things will lead to things being sold off for a mess of potage." Kamel al-Gailani, the Finance Minister in the provisional government, said the moves would open Iraq to free- market competition that would deliver investment, job creation and long-term economic growth.

"We are providing Iraqi citizens with the freedom and opportunities they were denied for so long under the Baath party to realise their economic potential," he said. "The reforms will advance efforts to build a free and open market economy in Iraq, promote Iraq's future economic growth, [and] accelerate Iraq's re-entry into the international economy and reintegration with other countries."

The moves presented by Mr Gailani, approved by the US and UK's coalition provisional authority, include:

. 100 per cent foreign ownership in all sectors except natural resources;

. direct ownership as well as joint ventures and setting up branches;

. full, immediate remittance to the host country of profits, dividends, interest and royalties.

Privatisation of everything from electricity and telecommunications to pharmaceuticals and engineering could see hundreds of previously state-owned companies sold off. There will be a tax holiday for the rest of this year, and income and business taxes for investors will be capped at 15 per cent from next year. Trade tariffs will be slashed to show that Iraq is a "country that embraces free trade". A 5 per cent surcharge will be levied on all imports, other than humanitarian goods such as food, medicine and books, to fund the reconstruction effort.

America defended the decision to offer such a generous package of tax breaks to entice investors. "Capital is a coward," said John Snow, US Treasury Secretary. "It doesn't go places where it feels threatened. Companies will not send employees to places that aren't secure." Iraq's vast oil reserves, the world's largest apart from Saudi Arabia's, would remain in government hands. "They're going to run government finances based on oil revenues," Mr Snow said. Five months after the overthrow of Saddam, there are no visible signs of reconstruction. Clean water and electricity are still not available to most people and entire neighbourhoods are still without phone lines. Washington is desperately seeking help with footing the $100bn bill it estimates rebuilding Iraq will cost.

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