IN 2005 on a dusty road in Tuz, Iraq, an American solder was killed by a roadside bomb. His fellow soldiers soon discovered that the assassin was no hardened terrorist, but an unemployed father of six who had been paid $200 to plant the explosive. Such situations are not uncommon in Iraq, where high unemployment spawned many “economic insurgents”—often unideological Iraqis in need of cash, who became easy recruits. It was, in part, in response to examples like this that a trio of former military officers created the Marshall Fund, a private-equity fund making only non-oil investments in smallish firms in Iraq. “Without thriving businesses and the jobs they create, Iraq will never be stable,” says Dan Rice, who founded the fund along with Wayne Culbreth and Andrew Eberhart. Late last year it closed on its first investment, a tomato-processing plant in the northern region of Harir.

It is profit, not patriotism, that most excites Mr Rice about Iraq. In this, he is not alone. Several multinational companies, from GE to Daimler Benz, have opened up shop in Iraq since 2007, when the country started to become safer as a result of America’s military surge. Luring these companies to Iraq are its huge reserves of oil, abundant water supplies, fertile land and strategic location. Then there are Iraq’s 30.7m citizens—all potential customers in a new consumer economy who “need and want everything from televisions to washing machines,” says Robert Kelley, one of a group of investors that is building a $120m luxury hotel in Baghdad.

That said, the insurgency in Iraq, though diminished, continues to flare. The country’s experiment with private enterprise is untested. Under Saddam Hussein’s dictatorship, the state controlled everything from interest rates to jobs at the bloated state-owned enterprises (SOEs) that dominated the economy. America began paving the way for a free market in Iraq as soon as Baghdad fell in 2003. The temporary American government abolished tariffs, freed interest rates, cut taxes and stitched together a patchwork of market-friendly bankruptcy and other rules. It also, in effect, shut down Iraq’s SOEs by restricting their access to cash, cutting employees’ pay by 60% and barring the government from doing business with them.

But a private sector failed to take root. In 2006, with unemployment and underemployment in Iraq well over 50%, according to government estimates, the American administration changed course. It created the Task Force for Business and Stability Operations in Iraq to jump-start the private sector, this time from the bottom up. The hope was that helping to create self-sustaining businesses and, with them, jobs, would give Iraqis—including economic insurgents—a stake in the country’s stability. It started by ensuring that American contracts went directly to Iraqi businesses. Since 2006, $2 billion of American contracts have been signed with over 5,000 private Iraqi firms. Next on the agenda was to undo some of the damage from earlier American policies. The Task Force received $50m in both 2007 and 2008 to restore production in Iraq’s 60 SOEs, some of which were running at 10% of capacity or less.

The Task Force’s most difficult job, however, was to find companies and investors to put capital and know-how into Iraq’s SOEs and private firms. It began arranging visits to Iraq for potential investors from around the world. It provided transport, security, food, offices and accommodation in Baghdad’s green zone, even today the only part of Baghdad where visitors from the West are reasonably safe. And it made introductions to government officials and potential Iraqi business partners.

The scheme has already notched up a few successes. Take Iskandiriyah, a manufacturing town. The Task Force arrived in late 2006 to restart the many factories once run by two SOEs there. Today they are producing machine parts, trailers and machinery for the oil industry. Case New Holland, a maker of construction equipment owned by Italy’s Fiat, began assembling farm tractors in 2007. In total around 5,000 Iraqis are back at work in Iskandiriyah’s two SOEs. The town is considered stable.

The Task Force also helps smaller investors put capital to work in Iraq. Consider the Marshall Fund’s $6m investment in the Harir tomato-paste factory, for example. Iraq imports $100m of tomato paste a year, even as its tomato farmers let their excess harvest rot on the vine, because Iraq has no way to turn tomatoes into cans of paste. The Marshall Fund’s investment in a tomato-processing plant not only gives factory workers a job, but gives tomato farmers a bigger market and shopkeepers a locally made product. “And because we expect to make a solid return—it’s a win, win, win, win,” says Mr Rice.

Last year foreign companies invested $910m in private Iraqi joint-ventures. Individuals and investors such as the Marshall Fund put in another $500m for start-ups. Will they reap profits or become a cautionary tale? As with many things in Iraq, it is too early to tell. Most investors still consider the country to be far too risky. The drop in oil prices is already causing a budgetary squeeze for the government, which has had to stop recruiting police and military personnel and reduce weapons purchases. The withdrawal of American troops could leave behind a dangerous vacuum. The Task Force’s aim is for it be filled by the private sector, not insurgents.

It's the economy, stupid -  Source