[Note: as pointed out by the Ambassador, there were some errors in Part I (apparently this is what happens when one attempts to interview and write with a flu-addled brain--a lesson in humility for those of us who like to smack around the mainstream media). 1) 1.5 and 2 million barrels a day refers to exports, not total production. Total production is 2.5 million/day. 2) The new government agency in charge of investment is the National Investment Commission, not an Investment Ministry (though the "commissioner" will hold a rank equal to Minister). 3) Oil revenue-sharing is happening today; the issue at hand now is adding foreign investment into the mix.]

Iraq was a centrally-planned economy under Saddam, with a government-owned industrial base. Ambassador Ries reports Iraqis have a desire to open up to the private sector as they rebuild, but he is concerned that foreign investment could aggravate unemployment (presumably by bringing in foreign employees), which becomes a political factor. He says, "Iraq will always be a country that depends upon its world-class petroleum resources, but the trick is to get better production of those resources.” Getting that better production is only going to come through foreign investment, because a great influx of money is needed to "fix up the country after four decades of devastation."

But this is where it gets complicated...

The Kurdish areas in Northern Iraq have grown tired of waiting for the revenue-sharing issues to be resolved, and regional governments have signed exploration and production agreements with smaller foreign oil companies. The national government has retaliated by blocking Kurdish access to the national oil pipelines, so their oil has to be brought to the borders of Iraq by tankers, which is much slower and more expensive than pipelines. Meanwhile, major international companies stand by, waiting for a chance to to get at the major fields in the South in exchange for a percentage of the profits, as the politicians keep fighting. According to Ambassador Ries, with the proper resources for exploration and production, oil will power Iraq's economy... but not until the legislature finally resolves the profit-sharing problem.

The oil issues are certainly complicated, but they pale comparison to the electricity challenge. The good news is that production and reliability are up strongly. Ambassador Ries reports, "We are making progress on production. [We] set records last fall and continue to be well about 2007 rates now." The bad news is that demand is rising at nearly an equal rate, and the sanction-battered infrastructure can't keep up. As the ambassador points out, this results in a massive shortage for the average Iraqi, who then expresses a great deal of dissatisfaction with the national government.

"Progress is slow and painful," says Ambassador Ries, as it is estimated the national electrical system of Iraq is producing enough electricity to meet only about 55% of the demand. The challenges include a lack of well-trained professionals to run things, and provincial/regional bitterness that sometimes prevents cooperation. In some places in Baghdad, citizens receive only two to three hours of electricity from the national grid each day.

Ironically, it's the growth in the economy itself that causes much of this. As the economy has improved, people have purchased more electronic devices--from cell phones to air conditioners. Ambassador Ries reports that people will buy a new air conditioner as soon as they can afford it, then run it constantly whenever the national electrical grid is producing for their region... because electricity off the grid is free.

And then the regional conflicts come into play, fueled by Saddam's history of using access to energy as a reward or punishment. With every air conditioner running full blast on a warm day, or all the lights in the city turned on, national production can't keep up. So, Baghdad calls Basra (for example) and says, "You've gotta go offline or the entire system is going to crash. Basra says (figuratively), "Hell, no!" and the results are predictable. Relatedly, Ambassador Ries says there has not been a history of planning ahead or conducting proper maintenance to avoid unplanned blackouts--which is partially a legacy of the challenges of operating under the UN sanctions during Saddam's reign. Thus he reports a lot of effort has been spent on teaching electrical employees to recognize signs of problems and act to prevent them, and to plan for regular maintenance/repairs, all of which have contributed to higher production.

The bright spot in all this is that entrepreneurial Iraqis have begun stepping up to fill the void. People often pay to hook into a neighborhood generator that can supply their homes with the power they need for times when the national system fails, and sometimes business buy a generator and offer power to locals when the business is closed. These systems are starting to effect a change in peoples' attitudes. Ambassador Ries explains, The ultimate solution to the electrical supply problems "is to manage the system in a reasonable way in which people pay for energy that they obtain--to create an incentive structure" so that they don't over use it (since they have to pay for it) and no longer view it as an entitlement they fight each other over. Oil-rich countries tend to not have a tradition of paying market prices for energy because it's subsidized by the government, "but it [paying for energy] is starting to happen."

One area of the Iraq economy that has been quietly making steady progress is the banking sector. When Paul Bremer led the Coalition Provisional Authority in 2003, he set up The Trade Bank of Iraq (TBI) to finance trade imports and exports through letters of credit. It is state-owned and still the biggest bank in a nation that only has 29 banks, and in which two of the nine state-owned banks hold 90% of the money. However, diversification is beginning to have an impact. Local/private banks are now developing relationships with major international banks such as Citibank so that they can offer letters of credit, too. In fact, TBI now refers all letter of credit requests under $2 million to private-sector banks, who work mostly with banks in London and Amman. Of course, this is just the beginning of a nationwide, modern banking system. "We still need more investment in private banks, says Ambasssador Ries, "It's a gradual process" that will grow along with increased foreign investment in other sectors of the economy.

One aspect of the banking system that is growing by leaps and bounds is the electronic infrastructure. Until the last few months, all banking transactions in Iraq were done by paper. Now electronic funds connections exist between the six largest banks, including the central bank, and claims are settled daily against the central bank by electronic funds transfer. According to the Ambassador, the creation of a nationwide electronic banking infrastructure is in-progress and a very high priority.

On the transportation front, Ambassador Ries says things are progressing and there is a lot of activity. But as in other areas, there is still much to be done. The direct train from Basra to Baghdad has been recently re-opened, as have other routes, most of which include both passenger and freight lines. Air travel and airfreight are also coming online: the Mosul airport was open for the Haj last year, and other regional airports are currently being rehabilitated. Transportation will continue to strengthen as violence is reduced.

So, the oil sector awaits the opportunity to accept outside investment, the electrical grid is beginning to sort itself out, transportation is active and growing, and the banking sector is continuing to develop. It sounds like Iraq should be a good investment opportunity for those who aren't averse to a little risk for a big payoff, but where are the foreign investors? Not surprisingly, part of the answer goes back to the legislature.

In the third and final post on this interview, we'll finally get to the meat of things: where the opportunities are (including those being put forward by the Ministry of Industry), where the professional work force is, and who will be leading the way.

UPDATE: Part III