VZCZCXRO3155
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1493/01 1341527
ZNR UUUUU ZZH
P 131527Z MAY 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 7346
INFO RUCNRAQ/IRAQ COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 04 BAGHDAD 001493
SENSITIVE
SIPDIS
STATE FOR NEA/I, S/I AND EEB
STATE PASS OPIC:DZAHNISER AND RMOSBACHER, JR.
USDOC FOR 4530/ITA/MAC/IIRTF/SHAMROCK
E.O. 12958: N/A
TAGS: ECON ETRD EFIN IZ
SUBJECT: OPIC PRESIDENT/CEO'S VISIT TO BAGHDAD -- FUTURE
MORTGAGE FACILITY FACES POLICY, REGULATORY, POLITICAL AND
PRACTICAL CHALLENGES
REF: BAGHDAD 1389
SUMMARY
--------
1. (SBU) OPIC President and CEO Mosbacher's two-day visit to
discuss a mortgage facility for low- and moderate-income
workers was useful in allaying Post's concerns set out reftel
regarding the risk of crowding out of a nascent private bank
sector; the role of the Trade Bank of Iraq (TBI) in the
facility; and OPIC's readiness to engage in an economy with
important legal and regulatory ambiguities. The question
remains of undermining the GOI's monetary policy by setting
up a facility that lends in dollars. New issues came to
light pertaining to the GOI ratification of the U.S.-Iraq
Investment Incentive Agreement of 2005 as an essential legal
framework for OPIC operations in Iraq; the extent to which a
large number of Iraqi ministries and institutions will need
to be brought into the approval process for the facility; and
the conundrum of designing a mortgage product that is in fact
affordable to the low- and moderate-income workers it
targets. OPIC has committed to applying the information
acquired on this visit to a formal proposal for the facility.
END SUMMARY.
INCLUDE, NOT CROWD OUT
PRIVATE BANKS
-----------------------
2. (SBU) OPIC President and CEO Robert Mosbacher, Jr.,
visited Baghdad May 8 and 9, accompanied by Robert
Drumheller, Vice President for Structured Finance; Rodney
Morris, Vice President for Insurance; and Dulce Zahnhiser,
Chief of Staff. David Strine, Managing Director of the Iraq
Middle Market Development Foundation, an OPIC-funded NGO,
joined the team for selected meetings. Although the subjects
of increasing OPIC exposure in its SME lending and classic
insurance products were raised with all interlocutors, the
primary objective of the trip was to explore the feasibility
of a pilot program for a new housing mortgage facility for
low- and moderate-income borrowers.
3. (SBU) Mr. Mosbacher directly addressed several of the
concerns Post expressed reftel regarding the mortgage
facility proposal in his call on Ambassador Crocker. He made
clear that OPIC proposed to partner with the Trade Bank of
Iraq (TBI) solely as an institution to share risk and provide
additional resources to the pilot -- perhaps even shouldering
the preponderance of risk. OPIC's intention was to push the
administration of loans and the assessment of individual
borrowers into appropriate private sector banks such as
Credit Bank of Iraq or Baghdad Bank. OPIC training would
build these lenders' back-office capacity and ability to
assess risk and administer loans, in keeping with OPIC's
development mandate. The objective would be building rather
than crowding out the private sector, and avoiding the
creation of another state-owned lending institution. Opening
participation to banks with Western partners could engage
these well developed institutions in building Iraqi financial
intermediation capacity, and perhaps engage the capital of
those institutions.
4. (SBU) The OPIC team took on board the more complex
question of making a lending facility denominated in dollars
and lending at interest rates based on the U.S. Federal Funds
rate compatible with Central Bank of Iraq (CBI) monetary
policies aimed at de-dollarization of the economy and
strengthening CBI control over monetary conditions. Post
stressed that USG initiatives must accommodate the time
needed for eventual reductions in the CBI's policy interest
rate in line with the successful lowering of core inflation,
which has remained stuck around 12 percent in recent months
and may spike again on the back of expected GOI wage
increases.
WANTED: A HOUSING
CONSTRUCTION INVESTOR
----------------------
5. (SBU) Discussion of the need for builders to have the
assurance of an immediate "take out" dominated the OPIC
team's meeting with Ministry of Finance Senior Advisor Dr.
Aziz Hassan Ja'far. Dr. Aziz stressed that Iraq does not
have builders with deep enough pockets to enable them to
construct "on speculation". The builder must be able to get
BAGHDAD 00001493 002 OF 004
the cost of the construction out of the project as soon as it
is completed, he said. He noted that this requirement
currently holds for all parties to significant construction
projects in Iraq. Investors, designers, contractors,
builders, suppliers -- none can wait the 20 years of a
mortgage to recoup their outlays, and Iraqi banks are
currently insufficiently capitalized to provide the "take
out" up front, he said. The OPIC team stressed that it was
precisely this lack in the financial intermediation system
that the pilot mortgage facility sought to address. Dr. Aziz
promised that if there are builders and financing able to do
the projects, Iraq has the land, materials and labor to
"build housing for 30 years -- we need 2.5 million units!"
6. (SBU) Dr. Aziz suggested that, on the specific question of
land, the Ministries of Finance and of Municipalities could
be counted upon to allocate appropriate parcels (as the
majority holders of property rights in the country). He said
it should be feasible to remove the cost of land from the
price of the resulting housing, reducing the mortgage burden
to the borrower.
TBI MUST GET ITS
BOOKS IN ORDER
-----------------
7. (SBU) The OPIC Team continued in person their ongoing
correspondence with the President and Chairman of the TBI,
Hussein Al-Uzri, focusing on details of the proposal, and the
Bank's uncertain bookkeeping. Mr. Mosbacher proposed that
TBI take on more than half of the financing risk for the
mortgage facility, stressing OPIC's limited Congressional
appropriation for credit subsidies. He noted that along with
asymmetrical risk sharing, OPIC was serious about building
private sector banking capacity through limiting TBI's role
to provision of capital. Given that the Iraqi housing market
is characterized by nearly unlimited demand, the OPIC team
asked how the mortgage facility pilot could be tested in a
limited amount of time. They asked for Al-Uzri's opinion on
whether it would be possible to set up a single entity
financier/builder, and whether it was in fact feasible to
expect the GOI to provide land free of charge.
8. (SBU) Al-Uzri told the team that he believed GOI provision
of land could be expected. He noted that it would be a
complex issue to obtain low-cost funds from GOI sources to
support TBI's contribution to the facility, but that
obtaining financing from commercial sources might be possible
for the TBI. Bringing in another GOI entity to share risk
might also be possible -- he suggested the Ministry of
Construction and Housing's Iraq Housing Fund. Assuming three
regional pilot projects, Al-Uzri opined that finding a
capable builder in the northern region wouldn't be
problematic, noting that reputable Turkish companies were
operating there, in some cases with their own financing. He
noted that security becomes an issue in the southern region
requiring land parcels that are outside urban areas and fully
securable, but that there are capable international companies
operating in provinces such as Najaf and Karbala. Ensuring
security and finding reputable builders were a problem in the
central part of Iraq.
9. (SBU) Al-Uzri cautioned that the ownership structure of
the implementing entity would be delicate, given the Iraqi
prohibition against foreign ownership of land. The entity
would have to be legally Iraqi in personality. Private bank
participation in the financing would require incentives,
perhaps including relaxation of the CBI's reserve
requirements. The cost of the mortgages would be an issue --
Al-Uzri agreed with Embassy Senior Advisor for Private Sector
Development June Reed when she noted that, with a median
government employee salary of $400/month, designing a
mortgage of sufficient principal to build an acceptable home
that can be repaid over 20 years with a monthly payment of
one-third or less of salary ($133/month) would be a real
challenge. Al-Uzri said that many of these issues would have
to be addressed as they arose in the implementation of the
pilots -- "We will have to learn how to maneuver around the
problems."
10. (SBU) The OPIC team said that their next step would be to
customize several OPIC "templates" used for construction
financing agreements, including designs for primary and
secondary mortgage facilities. Key elements required in all
such designs were specification of construction and labor
BAGHDAD 00001493 003 OF 004
standards, and protections for the borrowers and the lenders.
They committed to providing customized templates in the near
future. Last, the team made it very clear that OPIC would
not be able to move forward with this partnership proposal if
the TBI's financials were in any doubt, and urged Al-Uzri to
issue the TBI's 2006 audit report immediately, and to finish
the same for 2007 as soon as possible.
MANY MINISTRIES WILL NEED
TO BE INVOLVED
--------------------------
11. (SBU) The OPIC team met with the Deputy Minister of
Construction and Housing (MoCH), Mr. Istabraq I. Alshouk, and
the ministry's Senior Engineer, Mr. Majeed, to discuss MoCH
experiences in the provision of subsidized housing. Alshouk
expressed immediate readiness to agree in principal to the
OPIC proposal, but noted that high-level concurrence and
support from a number of other GOI authorities would be
needed, including the Ministries of Finance and of
Municipalities on questions of land; the CBI for questions
related to the banking operations; the Ministry of Trade on
the issue of company registration; the Ministry of Industry
and Minerals on the provision of building materials; all
other ministries whose employees might be the direct
beneficiaries of the low-cost mortgages; and the Prime
Minister himself. He said it seemed feasible for the MoCH's
Iraq Housing Fund to co-partner in the proposal, bringing
with it its experience in making some 8,000 mortgages to
ministry employees, with a commitment of $60 million in all
provinces, with an average loan size of $20,000.
JUST DO IT!
------------
12. (SBU) Iraq's nominee for National Investment Commission
(NIC) Chair, Ahmed Ridah, encouraged the OPIC team to move
forward as quickly as possible with the mortgage facility
proposal. He readily admitted that his own lack of full
legal authority to take decisions as the head of the NIC had
not stopped him making representations domestically and
internationally about the investment regime he felt Iraq
needed. He quickly listed a number of incentives he has
declared the NIC would provide, including tax holidays,
customs relief, one-stop shopping for business and investment
registration -- none of which has any legal force. When the
team brought up the need for the July 2005 U.S.-Iraq
Investment Incentive Agreement to be ratified in the Council
of Representatives in order to formalize OPIC's operations in
Iraq, Ridah advised the team to press full steam ahead,
regardless of legal standing. "Just do it -- that's what I'm
doing!"
COMMENT:
THEY WILL COME --
BUT CAN IT BE BUILT?
---------------------
13. (SBU) The OPIC team's meetings were useful in generating
interest across several GOI ministries in a pilot program for
a dollar-denominated mortgage facility benefiting low- and
moderate-income borrowers, while at the same time revealing a
number of challenges to be addressed in designing and
implementing such a program. A first-order question has to
be: Can an acceptable house be built at a price a
moderate-income borrower can pay if the GOI assists with
subsidies on both land and construction cost?
14. (SBU) As always in economics, with enough assumptions
anything is possible. We start our back-of-the-envelope
figures with the realistic parameters of free land from the
GOI; a 20-year mortgage at 10% interest; and a
moderate-income borrower with a monthly income of $600. We
ask that borrower to come up with a 20% down payment. We
also ask that the borrower commit 50% of income to the
mortgage payment (higher than OPIC's preferred optimum of
30%). That payment of $300/month can service a mortgage of
around $31,000; adding the 20% down payment, the construction
cost would be about $39,000.
15. (SBU) This will not buy the kind of home that OPIC, the
GOI, and the Iraqi people seek. A modest version of that
house has a construction cost of at least $50,000. Either
the borrower must come up with a larger down payment, or the
GOI must subsidize at a rate of some $11,000 per unit. A
BAGHDAD 00001493 004 OF 004
more typical construction cost for a "New Home for the New
Iraq" would be upwards of $75,000 -- either the per-unit
subsidy must climb, or the borrower's down payment goes up --
the second being the less realistic assumption of the two.
The scenario based on a construction cost of $39,000 was
already weak, assuming as it did that the borrower has an
income of $600/month; can find $8,000 for a down payment; and
pay 50% of income for a mortgage. Make that income $400, and
the payment 30% of income, with no down payment, and the
maximum mortgage amount looks like $13,000. Would the GOI
provide a $27,000 - $37,000 per unit subsidy? There is a
clear consensus among not only analysts, but most GOI
ministries, that a major effort is required -- but even with
the subtraction of the cost of land, this is going to be very
difficult.
16. (SBU) Then there will be the need to engage across a much
wider range of ministries to generate specific support in
terms of the provision of land, participation of employees,
supply of materials, as well as agreement to OPIC-required
standards for construction, labor, materials, borrower and
lender protection, etc. The CBI will need to be brought on
board to ensure that the banking operations either fit within
current prudential regulations or that these are modified --
all the while answering difficult questions about lending in
dollars in contradiction to current monetary policy
objectives. Issues of the TBI's still un-documented
financial audits for 2006 and 2007 remain to be resolved;
and, the NIC chairman-nominee's exhortation notwithstanding,
OPIC's ability to maintain operations in Iraq in the absence
of a ratified bilateral investment incentive agreement must
be addressed. That said, the need for housing is critical
and can only be addressed if the GOI participates in a
variety of ways, including extensive financial support to
ensure that low- and modest-income Iraqis can obtain adequate
shelter sooner rather than later. OPIC's proposal may
provide the impetus for the GOI and private sector to start
down the long road toward a market-based housing sector. END
COMMENT.
CROCKER