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DM Fiscal VI Hamin HC p09 op oá fe 17R7E7 TE0M aLLtt ExtIN • LACO Sector Groups Ministry of Industry and Minerals OCT 03 DEC '03 NOV '03 JAN. 04 MAR 04 -Ministry of Industry MIM. - Deadline Sign IPP. contracts to •Recelve SOE co. 330 MW of electricit for Lease financlats, and: •Lease Pgm tenters projections Pg. I bid stage 2.- request add. submission launch ethics 9118 SOES. Co. into. and detalled anticorruption proposals le 35 plants campaign. Review IG candidates m -update FPS security Prepare loan : strategy for SOEs applications for viabl •Lease Pom l-open initials bids Iplants pgm for MIM APR: 04 JUN '04 AUG '04 SEP. $04 MAY '04 JUL'04 OCT '04 LEMM -Review status of: Ministry sets course •Begin 2005 -Ministry for July-December: •Achieve end state for sudget Planning Ministry operating orepares 2005. Evaluate all SOE security plan under units and all SOE gbals and ob ectives Budget: plants:: Strategic Plans 2004 budget or each operating -constraints: 1 •Electrical power to plante #Identify tech consulting select SOE for. -Lease pgm 11 - 2nd Sign Lease Phase a a reaulred for I greater capacity. Agreements for Lease IPP. up and •Discuss plan to Pgm Il leasing pgm transition MIM to running, providing Ministry of Industrial 330 mw of power to Development and: SOES New Tragi government -Lease Pgm lI Investment Promotion revise & evaluaté takes power. bids: CPA dissolves* -Office of Compliance Initial report NOV *04 FEB :05 DEC '04 JAN $05 MAR :05 YAPR '05 I MAY 105 :Companies to prepare - financial: statements and reconcillations fy 2004- Dated 03.09.04 Ministry of Industry and Minerals FEB 104 MAR 104 DEC :03 JAN 04 OCT 03, NOV 03 Ministry of Industry MIM NFTE Training •Review - Deadline: -Receive SOE co. Training for Plant t ethics, anti- g. for SoEs for Lease MW of electricity financials and Selection of. •Lease Fam's enters corruption Managers- Pg-l bid projections: capacity campaign submission G for MIM. -launch ethics stage 2- request add Set up and detailed - 18 SOES- Go: info. F/up ones anticorruption bullding # Announce proposals Office of. proposed: le 35 plants campaign: Review IG candidates ponor pits Compliance Lease Pgm Il •update FPS security Prepare loan f/up on a Contact IEDC, to monitor. strategy for SOEs Donor pits "applications for viable rea training •Lease Pam L- open lease pgm Iplants e Pgm for MiM Initlals bids: SEP 404 AUG '04 JUL'04 OCT '04 APR '04 MAY '04 JUN 04 Revlaw status of Ministry sets course •Begin: 2005 -Ministry. Ministry operating for July December -Achieve end state for Budget Planning prepares 2005 abals and oblectives Bunits and all SOE 1 security plan under Evalate all SOE Budgeti 2004 budget. tor each operating I plants, Strategic Plans plant -constraints" 1•Electrical power to Identity tech: 1 select SOE for •Lease pgm ll-2m Sign Lease consulting: Phases Agreements for Lease greater capacity: reguired for, - IPP up and -Discuss plan to Pam Il leasing pgm. transition MIM to: running, providing 330 mw of power to Ministry of Industrial SOES Development and Now Iraqi -Lease Pom lI Investment Promotion goverment revise & evaluate bids Takes power -Office of 'CPA dissolves Compliance Initial report: FEB '05 DEC '04 NOV '04 MAY $05 MAR '05 JAN 05 APR '05 iS. Dated 03.09.04 - - - COALITION PROVISIONAL AUTHORITY BAGHDAD March 15, 2004 FOR: Strategic Plan Objective Holders and Designated Representatives. FROM: Director Policy Planning and Analysis -(b)(6) SUBJECT: The CPA Strategic Plan - Planning and Reporting Process. Introduction 1. Directors, Senior Advisors and CJTF-7 C-5 were advised by an Action Memo, dated 15 January 2004, of the Strategic Plan reporting process that would drive forward delivery of our priority objectives enabling the CPA and CJTF-7 executive leadership to better monitor and so . manage progress. Since then the Strategic Plan has migrated to the Oracle database, some necessary modifications to the reporting process have been made and there has been a change- over of some of the personnel involved in planning & reporting. Unfortunately, these changes have led to a decline in familiarity with the correct reporting process, and consequently, I believe it timely to issue a reminder of the reporting requirements and the process to be followed, particularly as we are soon to enter the last quarter before TOA when progress monitoring of the Plan will be increasingly important. Weekly Reporting Weekly reporting is required to be done by Objective Holders, or their designated representatives, against the Tasks within the Strategic Plan. Every week each Strategic Plan Objective Holder (e.g. Governance, Strategic Communications) is to update the Strategic Plan database, providing: i) a status narrative entry against each Supporting Task. The narrative will cover a) whether progress is on schedule and b) any appropriate significant events (significant vents may include those that occurred during the reporting period, and/or events tha vill occur that should be brought to the attention of management ii) a color code at Supporting Task, Key Task and Objective level. (Unfortunately, since migration to the Oracle database, this function has been available only for Supporting asks; however, the system is being modified to allow Objective holders to make th implete selection. Complain of tha wark is expected by 18 March, In th in OPPA to discuss allocation of color UNCLASSIFIED UNCLASSIFIED 3. The information required is to be collated during the week and input by Objective Holders or their designated representative directly to the Strategic Plan by latest 1800hrs every Thursday. The Strategic Plan inputs will be reviewed by OPPA on Friday. A further Review Meeting will be held Friday at 1430hrs to validate the inputs.' On the basis of the inputs, a Strategic Plan Status Check will be drafted by OPPA and 4. briefed to the Executive Board on Sunday. The Status Check will provide an overall synopsis of significant activity by Core Foundation and also highlight those significant tasks that are Red or Amber. Also, the Executive Board briefing will focus on CPO ministries and COO, respectively, on alternate weeks. Prior to each meeting OPPA and the Executive Board will determine on which Ministry to focus. This will enable the Executive Board to focus upon areas where there are problems with the implementation of the Plan. Monthly Reporting 5. During the last week of each month OPPA will collate changes to the Plan and produce an updated hard copy Strategic Plan for Ambassador Bremer for the forthcoming month. The updated copy will be issued with a covering memo detailing key changes to the Plan in the preceding month and likely areas of risk. Consequently, Objective Holders are to ensure that any agreed updates to the Plan itself as well as updates to status narratives for that week are completed by 1800hrs on the last Thursday of each month at the latest. Conclusion The combination of the existing daily reports to COO and CPO and the process of regular updates to the Strategic Plan will provide a wealth of material from which reports can be extracted at varying levels of granularity. In addition to the overviews for the Executive Board, IMU will be able to produce narrative reports for customers in Washington. CPO, COO and CJTF-7 (C-9) will also have access to the data they need to conduct more detailed analysis of developments in narticular areas of concern. The OPPA PoC for help with access to the Strategic Plan is (b)(6) Action As we work towards the 30 Jun deadline we have a good overall plan. In order to 7. improve implementing plans, synchronize our efforts, focus on problem areas and report our progress to the world, we must report progress on our objectives, key tasks and supporting tasks on a weekly basis. Each ministry and Strategic Plan Objective Holder must engage to track and applicable) are completed by 1800hrs on the last Thursday in each month. The table overleaf ' Comprising: OPPA, IMU, Working Group leaders, COO & CPO. UNCLASSIFIED .. • UNCLASSIFIED Weekly updates to Status Narratives are 1800hrs each Thursday due to be input by latest: Monthly updates to the Plan itself (if a. 1800hrs Thurs 25 Mar 04. applicable) should be completed by b. 1800hrs Thurs 29 April 04. c. 1800hrs Thurs 27 May 04. (PoC if difficulties are experienced is (bX6) UNCLASSIFIED The Ministry of Industry and Minerals Status of State Owned Enterprises Operational Status and Issues 6 January 2004 Ministry of Industry and Minerals Ministry of Industry and Minerals SOE Facilities State Owned Enterprise Facilities Immediate Needs for Operating (as of 1 December 2003) # of Needs Needs Needs repairs Needs # of facilities Operating Level Needs other employees Natural gas cash electricity from looting Substantial (60 - 0 2 7 10 4 4,768 100%) Partial (30 - 60%) 4 39 22 0 24 15 27,135 0 43 3 29 29,320 Minimal (1-30%) 39 15 70 25 Shutdown 0% 46,208 29 4 20 4 Total 78 107,431 162 27 66 114 MIM SOE Reemployment Challenges and Milestones April - All bank accounts frozen May Last priority for electricity allocation - No priority for coalition security • June - All public debts (only) forgiven - No positive working capital - First round of management firing - Proposed USAID Capital Fund withdrawn - Viability assessment of SOE initiated • July - Electricity allocation policy retains allocation status quo - 2003 Budget allocation from Ministry of Finance provides 45% of operational requirements - Viability assessment completed • August - - All private debts (prior to 9 April) now an obligation of the Treasury - Interim Minister announced - Reorganized under Private Sector Development - Fifty percent (50%) of operational funding released • September - Second round of management firing - MIM SOE obtain 180 MW of electricity - MIM FPS achieves 1,500 guards MIM SOE Reemployment Challenges and Milestones • October - MIM SOE obtain 230 MW from the grid - MIM initiates IPP tender MOE obtains 4,000 MW peak status and initiate maintenance program - MIM FPS campaign operational (2,500 guards) • November - Ramadan reallocates electricity away from industry - MIM FPS (3,500 guards) - MIM initiates lease program announcement • December - MIM FPS (4,500 guards) - MIM falls back to 180 MW • January - Second 50% grant allocation disbursed - MIM receiving little electricity (Cement Companies receiving as little as 5MW vice 25 MW) MIM SOE Reemployment Challenges • Liquidity problems and undercapitalization • Electricity • Customer demand • Capital expenditure budgeting • Security • Capacity • Freedom to conduct business - Many SOE lack incentives due to policy - Lack clear guidance on how to proceed • Unclear what the starting balance sheet is due to: - Current inventory and fixed assets changes daily with looting and security issues - Historical financials difficult to obtain - One time accounting adjustments for war not determined yet CPA MIM SOE Forward Strategy To address • Liquidity problems and undercapitalization - 2003 grant allocation ($130 million required - <$60 million received) - last 50% distributed in January 2004 - SOE loan program issues: • Lack of professional due diligence standards from Iraqi accountants • KPMG product disappointing • TAGI (Najaf Tire) to loan review in mid January - Operational budget for 2004 not articulated clearly • Clear guidance required on "Support to SOE" pot • MIM has clear vision on how to proceed for 2004: - Limit salary subsidy to firms that need it (3,6,9 and 12 month options) and allow MIM to reallocate balance Operations, capital expenditures etc. » Army rent proceeds » Fund reclassified SOE to Agency status (Industrial Promotion, Geological Survey, etc.) with operating budget » Offer a voluntary severance package » Pay private sector creditors ($100 million outstanding): Cement Factory $6 million; Rubber Company over 3 year A/P - Limit MIM salary schedule to 2003 wage level and use new salary schedule to provide a "production bonus" vice "profit bonus development strom monetied assets and profits to rebuild where feasible and establish a CPA MIM SOE Forward Strategy To address • Electricity - Delivered 11MW of small generating capacity to SOE - Independent Power Producers • Program benefits - Private sector investors ($560 million investment) assume risk - deliver electricity to factories on a KWh price. - Delivering 330 MW of power in 9 locations (10% of grid) - Begins price liberalization of the energy sector - by default • Program issues - Bank guarantee (from Trade Bank) - Memorandum 4 (applicable?) - Purchase of excess electricity (MOE committed - issue is source of funds) • Project issues - CPA MoE expressing interest to dovetail on project • Customer Demand - Obtained upward of $7 million in contracts for NIA - Attempting to secure interest with MoE - Issue of bidding on USAID/Bechtel Contracts directly (can become a sub) CPA MIM SOE Forward Strategy To address: • Capital Expenditure Budget Non existent other than loan Banking standards are 10-30% equity in a loan deal Many viable companies can not provide amount (Petro-chemical firms still not operating due to lack of gas pressure and electricity) Need for operating budget with CAPEX for select firms May need to revisit policy preventing the rebuilding of destroyed firms • Security - MIM "Train the Trainer" FPS (from improvised force to organized force) Routine issues with Coalition forces to resolve given MIM footprint • Capacity Development - Management Capacity • NFTE training (entrepreneurship 101) - Organizational Capacity Establishing "Lease Arrangements" for the non strategic industries - Eighteen (18) in first round... fifty three (53 proposals) Reviewing "Management Contracts" and other arrangements • Developing Business Plans - Operational plan for 2004 - Funding request Iraqi Accounting and Management Consulting firms engaged - Basis for loan program • Establish financial reporting capacity - teach them how to manage cash - World Bank/IMF training must incorporate Ministry and SOE CPA MIM SOE Forward Strategy To address: • Freedom to Conduct Business - No incentive to operate like a business • 95% of profits go up to Ministry of Finance - Could create a "cash crunch" for firms as they repay debt schedule and attempt to operate - Risk preventing some from pursuing loans • Workers paid the same regardless of productivity - Lack clear guidance on how to proceed • Issue is management reluctance to act and assume responsibility • Lack of Clarity on Starting Balance Sheet - Supreme Board of Auditors need to make a ruling on accounting adjustments from war and CPA policy - Nation wide adjustment required toward GAAP accounting principles : CPA MIM SOE Conclusion Each Ministry needs to manage its own SOE in a status quo - non privatized environment eed to review each SOE on an independent basis for continuing pport - no all encompassing approach will work The Ministry of Industry and Minerals 101st Air Assault Division 27 October 2003 Ministry of Industry and Minerals Agenda • CPA MIM Team • MIM Introduction • Where we've come from • Where we are • Where we want to go • Azimuth and direction Ministry of Industry and Minerals CPA MIM Team • Rick Ortiz - Senior Advisor, Commercial Attaché, Department of Commerce • LTC Brad Jackson - Deputy Advisor, Executive Director/CEO, Industrial Development Agency/Local Development Corporation; ASI 6C Economist • MAJ Terry McCall - Advisor, Attorney • SPC Glenn Corliss - Advisor, Financial Analyst, Leveraged Buyout Firm/Bank One • IRDC - Dr. Shakir Al-Zaidi - Founder and CEO of Specialty Chemical Manufacturer in England - Garabed Sahakian - Geologist, Pacific Gas and Electricity - Faisal Murad - Civil Engineer, Municipality of London - Dr. Adnan Hamoudi - Geologist, Professor Algiers University Ministry of Industry and Minerals (MIM) Dual Mission • Performing as a holding company for State Owned Enterprises • Performing as a government agency responsible for industrial and mineral development. the The former is short-term in nature... later is long term in nature. The former was key to a Socialist path the later is critical to a market economy Ministry of Industry and Minerals (MIM) SOE Introduction • Seven Sectors - Food - Chemical/Fertilizer/Petrochemical - Construction - Engineering - Service - Pharmaceutical - Textile • Each sector has strong and weak companies • Represent 100,000 employees • A $1.2 Billion operating company MIM SOE Challenges • Pre 2003 Setbacks - similar to Russian and CIS countries - Decades of Socialist thinking and poor management - Aged and neglected property and equipment - Closed Market - minimal export or import opportunity • 2003 War Setbacks - these are unique to Iraq - Extensive damage to property and equipment - Loss of Inventory - Complete loss of payment terms on raw materials purchases - 6 months of production lost - All cash in bank accounts frozen - All customers facing the same massive trauma - Much of the top management fired MIM SOE Reemployment Challenges April - All bank accounts frozen May - Last priority for electricity allocation - No priority for coalition security • June - All public debts forgiven - No positive working capital - First round of management firing - Proposed USAID Capital Fund withdrawn • July - Electricity allocation policy retains allocation status quo - 2003 Budget allocation from Ministry of Finance provides 45% of operational requirements • August - - Interim Minister announced - Reorganized under Private Sector Development • September - Second round of management firing MIM SOE Reemployment Challenges • Liquidity problems and undercapitalization • Electricity • Customer demand • Capital expenditure budgeting • Security • Raw materials • Freedom to conduct business - Many SOE lack incentive to make money due to CPA policy - Lack the freedom to operate - Lack clear guidance on how to proceed • Unclear what the starting balance sheet is due to: - Current inventory and fixed assets changes daily with looting and security issues - Historical financials difficult to obtain - One time accounting adjustments for war not determined yet CPA MIM SOE Reemployment Issues • Operating companies only with no experience in buying and selling in the open market • Labor-Management relations • Looting continues - largely from within • Extent to which dependent on subsidies not appreciated by current management - Oil for Food MOU • Existing operating machinery and equipment largely cannibalized • Real Estate more valuable than the operating company • Growing disgust at what they don't know or don't disclose - Assets which can be monetized - Failure to provide financials • Conclusion "These companies will not get better with time" - (In their current configuration) CPA MIM SOE Policy Successes • Influenced the Ministry of Finance to make "one-off" exceptions for otherwise viable Companies particularly hurt by the debt cancellation policy. • Set $60 million operating budget for MIM SOEs • Successfully argued for front-loaded distribution of $60 million to "prime the industrial pump" and get the businesses back up and running ASAP • Successfully argued for transition consulting fund for SOEs. Received $2.75 million • Successfully influenced an electricity distribution policy that includes industry • Successfully influenced Ministry of Finance to provide debt financing. • Successfully influenced the "freedom to conduct business" guidelines - Promulgated in Bremer's 6 September - Firm's have the authority to hire and fire - Firm's have the authority to set prices di jren CPA MIM SOE Forward Strategy To address • Capacity - Developing Business Plans • Operational plan for 2004 • Funding request - Pan Arabic Accounting and Management Consulting firm engaged • Establish financial reporting capacity - teach them how to manage cash • Liquidity - SOE Loan Program - 2004 Budget allocation i • Electricity - Independent Power Producers • Assume risk - deliver electricity to factories on a Kwh price • Delivering 330 MW of power in 9 locations - 35 MW Sinjar - 55 MW Badoosh • Security - MIM "Train the Trainer" FPS (from improvised force to organized force) MSC Support to SOE MSC can assist the MIM with the following: • Begin capacity development by assisting with the operationa component of the business olar - We will need to work together on the operational outcome • Support your local DG - In Labor-Management disputes - In local government vs. SOE disputes - In security considerations - Winter Campaign! • Support the CPA objective to "corporatize" the SOE - Cash constraints require we maximize profits • Support market solutions - Allow the firm freedom to conduct business - local government support a Lassiez faire approach with SOE - High Market Prices now mean lower prices and higher quantity later MSC Support to Factory Market Values Army Values • Communal Interest • Self Interest - Maintain standards - Invisible hand • Command and Control • Economic Individualism - C4I - Absence of intervention - Laissez-Faire - Planning Command Climate • Markets • - "Caring Leadership" - Price System "Impersonal" • Government Property • Private Property - Provides Incentive - Requires "duty" - Influences distribution of - High maintenance wealth - Requisition and issue - High degree of exchange Supporting Market Solutions Requires you to operate outside of your comfort zone 3. At present, it appears that these functions are not being fully implemented in the Ministry of Industry and Minerals, nor in any other ministry (though the Ministry of Planning is giving some attention to long term development). It seems that about 95% of the work of the Ministry of Industry and Minerals is devoted to supervising, directing and problem-solving for the SOEs. 4. Hence it is proposed that there should be a fundamental re-direction of the Ministry of Industry and Minerals : - away from being a holding company for SOEs, and towards being an industrial development and regulatory agency - away from the operational management of companies, and towards the policy management for industrial sectors - away from developing and protecting state enterprises, and towards promoting the private sector - But, in the short term, it will be unavoidable to continue some of the traditional operations of the Ministry, though in this respect it is proposed that there should be a fundamental shift away from direct control by the Ministry over the company managers, to indirect control by the Ministry through the boards of directors with a performance contract between the board (represented by the chairman of the board) and the Ministry. 5. Accordingly, the proposed new structure for consideration by the Minister contains the following main divisions and modules. A 'modular' organisational structure is deliberately suggested so that each organisational 'module' could be moved around from one division to another division of the Ministry, or transferred out of the Ministry of Industry and Minerals and into another agency, or another module could be transferred from another Ministry into the Ministry of Industry and Minerals. This proposed restructuring will require some redirection and also retraining of staff. In particular, those staff in the Ministry who have previously concentrated on controlling the SOEs will need to refocus on managing industrial market sectors, covering both the private and the state-owned factories in the sector. Also, and most important, the delegation of control over the SOEs away from the ministry to the boards of directors will need a special corporate governance training programme for all directors. The proposed Ministry organisational structure will consist of : The Minister's Office Industrial Advisory Council - Personal Staff - Minister of Industry (Chair) - Ministry of Trade Rep. - Inspector General (and Intl Audit) Central Staff Directorate - Ministry of Finance Rep. - Ministry of Planning Rep. - Strategic Planning and Statistics - Industry Associations - I.T. - Chambers of Commerce - Security Finance (- Cabinet Office Rep.) Personnel - others - Public Relations - Legal Adviser 04217 - - ----- Deputy Minister for Industrial and Minerals Development - Regulatory Directorate - Market Regulation - Product Standards - Environmental Standards - Social Impact Assessment - Competition Commission - Fair Trading Agency - Investment Promotion Directorate - Domestic (portfolio/direct) - Foreign (portfolio/direct) - Industrial estates - Competitiveness Directorate - Technology Development • ISO - Benchmarking - Export promotion - Industrial Clusters - Minerals Directorate - Minerals Survey - Exploration Licensing - Development Licensing Deputy Minister for State Enterprises - Sectoral Directorates - Chemicals Food and Agro-Industries Building Materials - Textiles - Engineering Metals - Electrical Transport - Boards of Directors of each SOE Draft for Discussion 25/April/2004 Ministry of Industry & Minerals Minister Advisory Council Central Staff Inspector General Directorate & Internal Audit Strategic Planning Legal IT & Data Bank Finance Personnel Security PR / Media Deputy Mi mister. Deputy Minister Industry & Minerals development Operations SOE's Boards Directors & mixed Chemicals * Industrial SOE's Boards Investment Regulation development & Mining Directors & mixed Food * Competitiveness Promotion SOE's Boards Construction* Market regulation Domestic Minerals Technology Directors & mixed development survey Textiles * Product standards Foreign SOE's Boards Directors & mixed Benchmarking Exploration & ISO Environmental Industrial Licensing standards estates SOE's Boards Engineering * Directors & mixed Export promotion Social impact assessments Industrial clusters Development SOE's Boards Metals * licensing Directors & mixed Competition commission Human resources development SOE's Boards Electric * Directors & mixed Fair trading agency Others as needed * SIC Classification Draft for Discussion 25/April/2004 Ministry of Industry & Minerals Minister Advisory Council Central Staff Inspector General Directorate & Internal Audit Strategic Planning Legal IT & Data Bank Finance Personnel Security PR / Media Deputy Minister Deputy Ministe Industry &e Minerals SOES & development Operations SOE's Boards Directors & mixed Chemicals + Industrial SOE's Boards Investment Regulation Mining development & Directors & mixed Food * Promotion Competitiveness SOE's Boards Construction* Market regulation Technology Minerals Directors & mixed Domestic develooment survey Textiles * Foreien Product standards SOE's Boards Directors & mixed Benchmarking & ISO Exploration Environmental Industrial standards Licensing SOE's Boards estates Engineering * Export promotion Directors & mixed Social impact assessments Industrial clusters Development SOE's Boards Metals * Directors & mixed licensing Competition commission Human resources SOE's Boards development Electric * Directors & mixed Fair trading agency Others as needed * SIC Classification Draft for Discussion 25/ApriV/2004 Ministry of Industry & Minerals Minister Advisory Council Central Staff Inspector General Directorate & Internal Audit Strategic Planning Legal IT & Data Bank Finance Personnel Security PR / Media Deputy Minister: Deputy Minister Industry & Minerals SOBS& development Operations SOE's Boards Directors & mixed Chemicals + Industrial Investment SOE's Boards Regulation development & Mining Directors & mixed Food * Promotion Comdetitiveness SOE's Boards Construction* Market regulation Technology Directors & mixed Domestic Minerals development survey Textiles * Product standards SOE's Boards Foreign Directors & mixed Benchmarking & ISO Exploration Environmental Industrial standards Licensing SOE's Boards estates Engineering * Directors & mixed Export promotion Social impact assessments Industrial clusters Development SOE's Boards Metals * Ticensing Directors & mixed Competition commission Human resources SOE's Boards development Electric * Directors & mixed Fair trading agency Others as needed * SIC Classification Draft for Discussion 25/April/2004 Ministry of Industry & Minerals Minister Advisory Council Central Staff Inspector General & Internal Audit Directorate Strategic Planning Legal IT & Data Bank Finance Personnel Security PR / Media Deputy Minister. Deputy Minister Industry & Minerals SOES & development Operations SOE's Boards Directors & mixed Chemicals * Industrial Investment SOE's Boards Regulation Mining development & Directors & mixed Competitiveness Food * Promotion SOE's Boards Construction* Market regulation Technology Domestic Directors & mixed Minerals develonment survey Product standards Textiles * Foreign SOE's Boards Benchmarking Directors & mixed & ISO Exploration Environmental Industrial standards Licensing estates SOE's Boards Engineering + Export promotion Directors & mixed Social impact assessments Industrial clusters Development SOE's Boards Metals * licensing Directors & mixed Competition commission Human resources SOE's Boards development Electric + Directors & mixed Fair trading agency Others as needed * SIC Classification Draft for Discussion 25/April/2004 Ministry of Industry & Minerals Minister Advisory Council Central Staff Inspector General Directorate & Internal Audit Strategic Planning Legal IT & Data Bank Finance Personnel Security PR / Media Deputy Minister. Deputy Minister Industry & Minerals SOES & development Operations SOE's Boards Directors & mixed Chemicals * Industrial SOE's Boards Investment Regulation development & Mining Directors & mixed Food * Comoetitiveness Promotion SOE's Boards Construction* Market regulation Technology Directors & mixed Domestic Minerals develooment survey Textiles * Product standards Foreign SOE's Boards Directors & mixed Benchmarking & ISO Exploration Environmental Industrial Licensing standards SOE's Boards estates Engineering * Directors & mixed Export promotion Social impact assessments Industrial clusters Development SOE's Boards Metals * licensing Directors & mixed Competition commission Human resources development SOE's Boards Electric * Directors & mixed Fair trading agency Others as needed * SIC Classification -— - Г PROPOSED RE-ORGANISATION OF MINISTRY OF INDUSTRY AND MINERALS For Discussion 1. The proposed re-organisation is directed by the strategic functions of the Ministry, based on a Function Review. The Function Review forms an analytical process which works through a series of simple questions to help identify the needs for various types of organisational forms. The most important element of the Function Review is that it ensures that the organisation structure is driven by the strategic function of the Ministry, not the other way round. The key questions in the Function Review are : 1) What are the essential functions which must be done to promote the industrial and minerals development of Iraq? 2) Who is carrying out these functions now ? 5) Is there anyone else who would be able to do the job better (including the private sector) ? 6) What are the current main operations of the Ministry of Industry and Minerals ? Do these fit in with the essential functions which are needed ? 7) Is the Ministry carrying out the right functions at the right time in the right place with the right people at the right cost and with the right results? These are simple questions, but they are invariably not so simple to answer. 2. The essential functions which must be done to promote the industrial and minerals development of Iraq are outlined in the Draft Green Paper and are suggested to be : a) Long term strategic policy formulation for industrial and minerals development b) Promotion of the competitiveness of national industry and mining c) Regulation of the industrial and minerals sectors, especially through ensuring free and fair market competition, proper standards for the protection of public interests, and self-regulation d) Promotion of both national and foreign direct and indirect investment in industry and mining e) In the short and medium term, the restructuring and privatisation of the Ministry's SOEs f) In the immediate term, the restart of the state and private industrial and mining companies to provide critical supplies for reconstruction, cover all or part of the costs of the salaries, and activate the economy through the industrial supply chain. PROPOSED RE-ORGANISATION OF MINISTRY OF INDUSTRY AND MINERALS For Discussion 1. The proposed re-organisation is directed by the strategic functions of the Ministly, based on à Function Review. The Function Review forms an analytical process which works through a series of simple questions to help identify the needs for various types of organisational forms. The most important element of the Function Review is that it ensures that the organisation structure is driven by the strategic function of the Ministry, not the other way round. The key questions in the Function Review are : 1) What are the essential functions which must be done to promote the industrial and minerals development of Iraq? 2) Who is carrying out these functions now ? 3) How are they carrying out these functions - well or badly ? Why are these particular agencies or people carrying out these functions ? 5) Is there anyone else who would be able to do the job better (including the private sector) ? 6) What are the current main operations of the Ministry of Industry and Minerals ? Do these fit in with the essential functions which are needed ? 7) Is the Ministry carrying out the right functions at the right time in the right place with the right people at the right cost and with the right results ? These are simple questions, butthey are invariably not so simple to answer. 2. The essential functions which naust be done to promote the industrial and minerals development of fraq are outlined in the Draft Green Paper and are suggested to be : a) Long term strategic policy formulation for industrial and minerals development b) Promotion of the competitiveness of national industry and mining • Regulation of the industrial and minerals sectors, especially through c) ensuring free and fair market competition, proper standards for the protection of public interests, and self-regulation d) Promotion of both national and foreign direct and indirect investment in industry and mining e) In the short and medium term, the restruoturing and privatisation of the Ministry's SOEs t) In the immediate term, the restart of the state and private industrial and nining companies to provide critical supplies for reconstruction, cover all or part of the costs of the salaries, and activate the economy through the industrial supply chain. 3. At present, it appears that these functions are not being implemented at all in the Ministry of Industry and Minerals, nor in any other ministry (though the Ministry of Planning is giving some attention to long term development). Hence the main issue is not so much whether these functions are being performed well or badly but whether they are being done at all, and why the ministries are not carrying out these functions. It seems that the main operations (about 95% of the work) of the Ministry of Industry and Minerals are devoted to supervising, directing and problem-solving for the SOEs. 4. Hence it is proposed that there should be a fundamental re-direction of the Ministry of Industry and Minerals: - away from being a holding company for SOEs, and towards being an industrial development and regulatory agency and towards promoting the private sector - But, in the short term, it will be unavoidable to continue some of the traditional operations of the Ministry, though in this respect it is proposed that there should be a fundamental shift away from direct control by the Ministry over the company managers, to indirect control by the Ministry through the boards of directors. 5. Accordingly, the proposed new structure for consideration by the Minister the following main divisions and modules. A 'modular' organisational structure is deliberately suggested so that each organisational 'module' could be moved around from one division to another division of the Ministry, or transferred out of the Ministry of Industry and Minerals and into another agency, or another module could be transferred from another Ministry into the Ministry of Industry and Minerals. The proposed Ministry organisational structure will consist of : The Minister's Office Industrial Advisory Council - Personal Staff - Minister of Industry (Chair) - Ministry of Trade Rep. - Inspector General (and Intl Audit) - Central Staff Directorate - Ministry of Finance Rep. - - Ministry of Planning Rep Strategic Planning and Statistics - Industry Associations I.T. - Chambers of Commerce Security Finance (- Cabinet Office Rep.) - others Personnel Public Relations Legal Adviser -- - Deputy Minister for Industrial and Minerals Development - Regulatory Directorate - Market Regulation - Product Standards - Environmental Standards - Social Impact Assessment - Competition Commission - Fair Trading Agency - Investment Promotion Directorate - Domestic (portfolio/direct) - Foreign (portfolio/direct) - Industrial estates - Competitiveness Directorate - Technology Development - ISO - Benchmarking - Export promotion - Industrial Clusters Minerals Directorate - - Minerals Survey - Exploration Licensing - Development Licensing Deputy Minister for State Enterprises - Sectoral Directorates - Chemicals - Food and Agro-Industries - Building Materials Textiles Engineering - Metals Electrical - Transport Boards of Directors of each SOE Ministry of Industry and Minerals Inspector Genera - Internal Audit Deputy Minister, Deputy Minister, Industry and Minerals SOEs Development Regulation SOOC minister MIM Idvisore Admin Sentin /Ast) 5trategy - ouncil min's Advisors Bank data Leyal, depar investment Ancillary SOES operations &development MIC companies mixed mineral Sector mixed • development sector compancer industrial Planning product. Administr. operations atian. & Budgeting devetopment Mic industrial Companies Planning Technical Admini. Estates Ollid not Lasses department stration min's industriale 80/5. development Budgeting. Sales & security ffinance Marketing control Auditeng gal Fernerd Environmental ISO Business Certifilation. Ministry of Industry and Minerals lăing Cói information dards intemal Audi Technology Traing ? 14 April 2004 Page 1 of 2 (b)(6) From: (b)(6) Sent: Sunday, February 08, 2004 9:20 AM To: (b)(6) Subject: FW: Access to the Strategic Plan database ----Original Messane-- From: (b) (6) Sent: Sunday. February 08, 2004 9:18 AM To: (b)(6) Subject: FW: Access to the Strategic Plan database This should get you to the plans. (b)(6) CPA Oftice of Policy Planning and Analysis Palace M239 (b (6) ----Original Message----- From: (b)(6) Sent: Wednesday, November 19, 2003 11:56 AM To: (b)(6) | Agresto, John T. (SES); Alhakim, Mohamed; Arsht, Leslye A. (SES); Castle, Edwin S. (SES-2 General Counsel): Evers, Williamson M. (SES): Fatfat. Mounzer R. (SES): (h)/61 (b)(6) Johnson, susan R. (SESR(hi/6) McKee, Robert E. (SES); /h V/Cl (b)(6) Trent Darrell (SES-6) (bV/6) TGBR): Crane, Keith W. (SES); (b)(6) (b)(6) Subject: Access to the Strategic Plan database Please see attached to skeleton Milestone slide for Ministries and the path to the Strategic Plan Access Database. The path to the plan on the CPA Public Folder is: 'right click' on My Computer and 'left click' Explore then left click in turn on: My Network Places Entire Network Microsoft Windows Network Orha Fserv2 2/17/2004 : Page 2 of 2 Public To read: Open 'CPA Strategic Plan as of 1 Nov (read only)' folder and select 'Feb 3 Strategic Plan' To edit: Open 'CPA Strategic Plan (Write)' folder and select '8 Feb Strategic Plan' (it is the only one) If you or your staff require write access - please contact me - thank you (bV6) Wing Commander (OF-5) HQ CPA Rm M239 (b)(6) 2/17/2004 - - Page 1 of 1 Ministry of Industry & Minerals 1. Security - State Enterprises need adequate security to ensure that personnel, plant, and equipment are secure. 2. Employment - Determine adequate personnel levels for the Ministry and the state companies and determine how to reduce over-employment. We should identify the most competent managers in each industry sector and at company plants to act as decision making heads that report progress directly to the Minister. The minister should reorganize the Administration Department to be more flexible and expedient in addressing urgent personnel issues. 3. Management - Restructure the strongest of the SOEs to enable those firms that are self sustaining to grow and prosper as independent entities, while successfully exercising Leasing and Liquidation strategies for the weaker firms and plants. Strengthen the Administration and Accounting Departments ' to improve budget and fiscal accountability, monitoring and tracking of funds; we should also revamp and strengthen the Technical Department to track progress and identify areas of potential future growth, while identifying solutions to problems and concerns. We should establish clear lines of responsibility for each DG, and draft a Standard Operating Manual to establish the means of accomplishing tasks and initiatives in an efficient and effective manner. 4. Essential Needs Assessment - Upon completion of the SOE assessments, fine tune and streamline plans for obtaining Liquidity, Electricity, and Raw Materials to enable SOEs to re-open or expand operations. Identify necessary modifications to production, sales and marketing that will enhance the viability of existing firms. (It is not enough simply to get companies running again, they must produce products that are high quality, attractive and durable, and able to compete with growing import competition.) http://intranet.orha.centcom.mil/Government/OPP/ANNEX 2/8/2004 _A.htm Ministry of Industry and Minerals JAN '04 FEB 04 OCT '03 1 DEC 03 MAR '04 NOV '03 E Ministry of Industry Review Sign IPP contracts fol NFTE Training Review: •Receive SOE co. - Deadline •Training for Plant: status of. UN, i for Lease 330 MW of electricity ethics, anti- Pg. for SOEs financlals and Selection of Donor corruption •Lease Pgm I enters *Managers- Pg. (i bid projections projects capacity stage: 2 - request add G for MIM campaign submission launch ethics: Announce detailed bullding •Set up Corinfo, and F/up on anticorruption 18 SOES Announce Office ofia • Lease Pgmil proposed proposals ie 35 plänts campaign. Complance winners Lease Rgmill Donor pits. Review G candidates •update FPS security •flup on 1- A NETE Contact IED to monitor strategy for SOEs I •Prepare loan trainnees Hease pgm •Lease Pam [-open applications for viable to: training Donor pits train others plants Initials bids pom for MIM JUL'04 SEP '04 JUN '04 AUG '04 ост '04 MAY "04 APR '04 •Review status of -Ministry sets Ministry. •Lease Pgm II -1 course for July- / Ministry operating. i Closing of Lease Pai deadline for bids. prepares 2005 December goals. [units and all SOE -Achieve end state for Budget: Identify: ahd oblectives for plants: character/nature FPS enhanced each operating PIPP up and 1 security plan. of technical l running, providing plant Loase pgm lI -open advice needed to bids: Sign Leasel 330 mw of power to gulde leasing SOES Agreements for Discuss plan to program toward. Lease Pgm Il transition MIM to -Lease Pgm lI successful completes Ministry of Industrial transfer to private New Iraqi Development and management. evaluation of bids Office of government Investment Promotion: -NFTE trainees Compliance Initial: takes power: train others report 'CPA dissolves' FEB '05 APR '05 DEC 104 MAR '05 NOV 04 MAY '05 JAN 05 EMIM •Companies to oreDare inancia statements and reconciliations ty 2004 Dated 01.08.04 Strand Issue Comments Category Status Strategy for implementing prioritized list of 2.1.1 Other than a proposed lease/partnership there os no reference to a long term Red plan. Review Ambassador Bremer plan. short-term (1 year) and long-term(2-5) years Green goals Yellow Strategy No indication in Plan Red Ownership of strategy down through the Green Ministry Yellow No indication in Plan Red Ministry structure and staffing levels designed Green which support organizational goals Yellow Structure Red check organization chart Progress in making appointments at DG level Green and tiers below, including Inspector General Yellow No indication in Plan Red Analysis of training/capacity needs completed Green Yellow Skills No indication in Plan Roll out in Ministry of consequent Red management training programmes down Green through senior and mid-level staff Yellow No indication in Plan with respect to governates; budgeting process in irder for short a. Principles of coordination and term; no personnel policies apparent in plan; security issues unknown. communication with governates clear Readiness for b. Financial control and budgeting systems Red developed Green Transition c. Existence of personnel policies based on Yellow CPA template d. Adequate security plans No indication in Plan. Systems a. Basic Connectivity (phones, email) in place for key regional Ministry staff b. Consistent capability to pay staff salaries, get money to governates and transparently Red execute competitve contracts Green c. Proportion/level of Ministry staff with agreed Yellow job descriptions d. Ministry payment of FPS staff in agreed numbers and locations Unknown Outline areas where support will be needed Red by Ministry after 1 Jul or when minister stands Green down: identification of source of support Yellow Support Unknown Red Level of agreement down through ministry Green Yellow Kuklas Ministry Transition Interview Checklist FEB 6 2004 Date INDUSTRY AND MINERALS Ministry Interviewee(s) (b)(6) Interviewer(s) OPPA Civil Affairs Ministry Transition Interview Checklist FEB 6 2004 Date INDUSTRY AND MINERALS Ministry Interviewee(s) (b)(6) Interviewer(s) Civil Affairs OPPA Leag- "Privatzy Mongrat" "Transfinatio alk. 3 Inhast - 5yr. 50E NY litakler ebld paulinet →> bust Privative Told & Dates Maket Ing Issue Category Status Comments 1200 Stand .1.1 Other than a proposed lease/partnership there os no reference to a long ter Strategy for implementing prioritized list of Red Рая Deol lan. Review Ambassador Bremer plai short-term (1 year) and long-term(2-5) years Green wall goals Yellow seve Strategy Red Ownership of strategy down through the Green Get buyin - No indication in Plan el Din Lendeslipe D6 level, Ministry Yellow Red Ministry structure and staffing levels designed Green which support organizational goals Yellow Structure Red Progress in making appointments at DG level Green and tiers below, including Inspector General Yellow hector endive = va indication in Plan Male, Fine, "Arry- Analysis of training/capacity needs completed - trab in tao Skills Roll out in Ministry of consequent management training programmes down through senior and mid-level staff a. Principles of coordination and communication with governates clear Readiness b. Financial control and budgeting systems for Transition c. Existence of personnel policies based on d. Adequate security plans No indication in Plan. Systems Ta. Basic Connectivity (phones, email) in place for key regional Ministry staff b. Consistent capability to pay staff salaries destitt Red get money to governates and transparently execute competitve contracts Green Hotzoo" - AlEplan - c. Proportion/level of Ministry staff with agreed Yellow d. Ministry payment of FPS staff in agreed Unknown Red Outline areas where support will be needed y Ministry after 1 Jul or when minister stand: Green lown; identification of source of suppor Yellow Support Red Unknown Green Level of agreement down through ministry Yellow Strand Issue Category Status Comments 2.1.1 Other than a proposed lease/partnership there is no reference to a long term plan. New plan is being Strategy for implementing prioritized list of incorporated into Strat Plan which includes elimination of the SOEs within a 3-5 year timeline; will require short-term (1 year) and long-term(2-5) years Yellow extensive coordination with Private Sector and Strat Comm. goals Strategy No current buy in from Ministry. Ownership of strategy down through the Red Ministry Must be added to Strat Plan. Ministry structure and staffing levels designed Yellow which support organizational goals Structure New Organization chart being prepared; with 2 DGs; Minister will NOTmake IG recommendation. Progress in making appointments at DG level Red and tiers below, including Inspector General Major funding short fall. Analysis of training/capacity needs completed Yellow Skills Roll out in Ministry of consequent No indication in Plan / management training programmes down wh through senior and mid-level staff Yellow, No indication in Plan with respect to governates; budgeting process in order for short term; no personnel a. Principles of coordination and policies apparent in plan; security issues unknown; major discrpancy between FPS funding and number of Readiness communication with governates clear - for b. Financial control and budgeting systems Transition Yellow 14g18 c. Existence of personnel policies based on - sui gain or can deal, CPA template d. Adequate security plans - In place Try /wald Bh /DMF Gapp, fa. Cahols, En Rest, Major gap in planning process in connectivity; job descriptions. Salaries are paid at every level; including Systems a. Basic Connectivity (phones, email) in place -no// Decaput IT pigen the bluldy. for key regional Ministry staff b. Consistent capability to pay staff salaries, get money to governates and transparently execute competitve contracts Yellow c. Proportion/level of Ministry staff with agreed job descriptions a coasty stat win agree On sept q cand parr will be renth Mi d. Ministry payment of FPS staff in agreed numbers and locations dace: Coordinator; Coalition i Total five personnel Arministaken Vegal NE Outline areas where support will be needed y Ministry after 1 Jul or when minister stand: Coathe Coolite down; identification of source of suppo Support En mite No buy-in from Ministry Level of agreement down through ministry Aim: hug ads for poes gyrates Implement Policy Towards State Owned Enterprises (SOEs) POC Key Task Status Narrative 1 July - 30 September (Q3) 2004 - Onwards 1 January - 31 March (Q1) 2004 1 April - 30 June (Q2) 2004 Tom Foley 7 Implement Policy Towards State Owned Enterprises (SOEs) Return SOEs to pre-war operating levels, where appropriate e.On track. Private financing and Return SOEs to pre-war operating 1. What was peolevels? levels, where appropriate possible ownership transfers being discussed with respective ministries. a. Continued progress of SOEs "Key sE only. Lish 1.12/23/03 update - No ownership standing up to normal operating levels.Salaries will be transfer options at this point although the CPA continues to assist the subsidized indirectly. Subsidies will not be removed ministries to evaluate leases 2.12/30/03 update - Revised SOE action plan in development. Work continues on addressing barriers preventing SOEs from standing up 3.1/7/04 update -Need to re-evaluate current SOE strategy based on current political constraints 4.1/26/04 Work continues. Pushing Iraqi Central Cement to apply for a $10MM capital expenditure loan through SOE state banks Need to re-evaluate current SOE 2 Continued progress of SOEs standing up to normal operating strategy based on current political levels. constraints Need to re-evaluate current SOE 4 SOEs are facing hard budget strategy based on current political constraints and are taking steps constraints. Based on financial to alleviate pressures. These reports from selected SOEs conducted steps include the pursuit of by KPMG and Talal Abu-Ghazaleh & leasing of property of many of Co. International (TAGI), the Iraqi unprofitable SOEs. Need to re- Central Cement Company (ICCC) and evaluate current SOE strategy Najaf Tire could have loan packages based on current political completed within the month. CPA is constraints working with ICCC to apply for a $10 million capital expenditure loan through Economy Page 21 of 37 Sunday, February 08, 2004 Implement Policy Towards State Owried Enterprises (SOEs) Key Task POC 1 January - 31 March (Q1) 2004 1 July - 30 September (Q3) 2004 - Onwards 1 April - 30 June (Q2) 2004 Status Narrative Iraqi state banks. 2 Find sources for financing their short term working capital and investment requirements - (leasing). 1 Improve monitoring system to Need to re-evaluate current SOE a process. Ministries improvi track performance of SOEs. nternal reporting techniques strategy based on current political constraints. 111 bidders are competing in a review process to lease an we get copie 35 plants belonging to 18 Ministry of Industry and Mineral SOEs. Of the 111 bidders, 20 are foreign and 91 are Iraqi (many have opted to form partnerships with international firms, a reprty? very positive step toward free enterprise). A committee process (in conjunction with Merchant Bridge consultants and IRDC staff) will whittle down the candidates and a short list will be invited to make a complete proposal which will begin the firms due igence process. Do not anticipate ase deal within the next 3 mont Sunday, February 08, 2004 Page 22 of 37 Economy Implement Policy Towards State Owned Enterprises (SOEs) Key Task POC 1 January - 31 March (Q1) 2004 1 April - 30 June (Q2) 2004 1 July - 30 September (Q3) 2004 - Onwards Status Narrative 3 Hard Budget Constraints 1 Need to re-evaluate current SOE Continue to assist restructuring eed to re-evaluate current SC strategy based on current politica efforts as advisors. rategy based on current politic constraints constraints 04 SOE Budgets being reviewed by OMB. Ten private Iraqi accounting firms and one international firm (KPMG) are preparing financial report or some SOEs in order to help th stronger firms apply for liquidity loan: and assist the ministry in determinin the viability of the remaining firms. 2 Examine restructuring state Need to re-evaluate current SOE owned insurance companies. strategy based on current political constraints Need to re-evaluate current SOE strategy based on current political constraints 4 a Develop Restructuring Plan for SOEs 1 Plan presented verbally to AME Bremer. Follow on memo outlining SOE plan to be submitted by the enc of the week Economy Sunday, February 08, 2004 Page 23 of 37 Page 1 of 1 Ministry of Industry & Minerals 1. Security - State Enterprises need adequate security to ensure that personnel, plant, and equipment are secure. 2. Employment - Determine adequate personnel levels for the Ministry and the state companies and expedient in addressing urgent personnel issues. 3. Management - Restructure the strongest of the SOEs to enable those firms that are self sustaining to grow and prosper as independent entities, while successfully exercising Leasing and Liquidation strategies for the weaker firms and plants. Strengthen the Administration and Accounting Departments to improve budget and fiscal accountability, monitoring and tracking of funds; we should also revamp and strengthen the Technical Department to track progress and identify areas of potential future growth, while identifying solutions to problems and concerns. We should establish clear lines of responsibility for each DG, and draft a Standard Operating Manual to establish the means of accomplishing tasks and initiatives in an efficient and effective manner. 4. Essential Needs Assessment - Upon completion of the SOE assessments, fine tune and streamline plans for obtaining Liquidity, Electricity, and Raw Materials to enable SOEs to re-open or expand operations. Identify necessary modifications to production, sales and marketing that will enhance the viability of existing firms. (It is not enough simply to get companies running again, they must produce able to compete with growing import products that are high quality, attractive and durable, and competition.) 2/8/2004 http://intranet.orha.centcom.mil/Government/OPP/ANNEX_A.htm - Restructuring the State-Owned Banks of Iraq Issue: Whether and when to move beyond the initial rehabilitation of the state-owned banks to a fundamental restructuring of bank operations, organizations, and ownership. Considerable efforts to rehabilitate and strengthen the state-owned banks are underway. In an early stage, these efforts were directed to assessing bank needs, enhancing security, reopening branches, restoring communications, and supporting other institution-building activities. In the present stage, key bank strengthening activities include: • Modernizing bank operating policies, procedures, and systems • Strengthening accounting practices and reporting in compliance with international accounting standards (IAS) • Upgrading internal budgeting, monitoring, and financial review processes • Improving bank automated systems and information technology infrastructure • Revising credit policies, procedures, and systems in compliance with international best practices • Providing comprehensive training programs for bank managers and staff It is now necessary to consider whether and when to realign the organizational structures of the state-owned banks and to prepare them for ownership transfer to the private sector. In the next stage, a fundamental financial and organizational restructuring would include the following activities: • Completing balance-sheet adjustments for each institution • Adopting international best practices for disclosure and transparency • Improving bank management and governance mechanisms • Rationalizing nationwide branch networks and consolidating • Developing and implementing smarine business plans • Transferring bank ownership to the private sector Further discussion of the current condition and proposed restructuring of the state-owned banks follows. The discussion assumes that fundamental restructuring will be reinforced by a strong legal framework and effective bank supervision. R/R. - Fold + non performing Keries Current Condition of the State-Owned Banks Bank Structure • The two large commercial state-owned banks, Rafidain and Rasheed, together account for about $1.8 billion in assets or about 86 percent of the total assets in the banking system. • The two banks maintain about 330 branches, of which about 260 branches are currently open. Together, the two banks have more than 2.8 million deposit accounts and 14,500 employees. • The four small specialized state-owned banks (i.e., the Agricultural Cooperative Bank, Industrial Bank, Real Estate Bank, and Socialist Bank) together account for about 7 percent of the total assets in the banking system. • The four banks maintain about 50 branches. Although they were established originally to serve specific sectors of the Iraqi economy, since 1997 they have been authorized to conduct general commercial banking activities. Bank Assessment An overview assessment of the state-owned banks was conducted by a team of U.S. Treasury banking advisors, supported by USAID contractor personnel. Its findings are summarized below. • The available financial statements of the six state-owned banks indicate unusual asset/liability structure and weak financial condition. The six banks hold large amounts of cash and government securities, but relatively small amounts of loans and other assets. • In general, the state-owned banks are undercapitalized, with poor asset quality and weak management structures. Although the banks have adequate liquidity, they rely heavily on interest income from Iraqi Treasury bills for their earnings. • In addition, the state-owned banks are in poor physical condition and require substantial rehabilitation of their facilities, information systems, and office equipment. Managers and staff need training in modern banking practices. - 2 - Necessity for Restructuring the State-Owned Banks Microeconomic Considerations • Several of the state-owned banks present liquidity and solvency concerns, and all of the banks face unresolved issues including attachment risk impeding foreign operations, the treatment of intra-government obligations, and high levels of non- performing assets resulting from many years of government-directed activity. • Of particular concern are capital adequacy, asset quality, and management depth. For example, the system-wide total capital ratio is about 2 percent (compared to a legal requirement of 12 percent) and non-performing loan ratios range from 50 to 90 percent of total private credit. • The continuing process of rehabilitation will not address the underlying structural problems of the state-owned banks such as excessive staff, inefficient operations, and inadequate competition. Macroeconomic Considerations The weak condition of the state-owned banks is impeding the recovery, growth, and development of the real enterprise sector and, to some degree, of the other institutions and markets in the financial sector. The macroeconomic results are lower employment, income, growth, and security. • In the short to medium term, a restructuring of the state-owned banks will be an important component of the effort to re-establish financial services to the Iraqi economy and to increase employment, income, growth, and security. • Proper management and ownership structures, within a regulatory framework that is consistent with international best practice, are essential to financial strength and systemic stability. Other Considerations • The weak condition of the state-owned banks could make the Iraqi economy vulnerable to a banking and financial crisis, in the event of further internal conflicts or external shocks. • The international financial institutions (i.e., IMF and World Bank) may be expected to require financial-sector restructuring and reform as part of the conditionality of programs for financial and technical assistance. - 3 - Key Elements of Restructuring the State-Owned Banks Strategic Planning • Government decision-makers must recognize the breadth and depth of problems in the state-owned banks. • Early commitment to bank restructuring should be followed by early action on a multi-year strategic plan. • It is necessary to develop and implement such a plan to enhance the value of the banks in preparation for an ownership transfer to the private sector. Management Structures • New management and governance structures are needed to guide the restructuring process and to oversee plan implementation, with operational independence from the Ministry of Finance. • Efficient and effective institutional arrangements must be adopted to value bank assets, adjust balance sheets, and resolve non-performing loans. • New management must have broad powers and political support to close insolvent institutions and to merge weak institutions despite criticism and opposition. Restructuring Goals • The overall goal is to create a competitive, privately-owned banking system that operates in accordance with international best practices. • Bank supervision policies and procedures must be strengthened in order to avoid recurring problems and repeated restructurings of the banking system. - 4 - Bank Restructuring Proposal and Organization Restructuring Components • A restructuring proposal for the state-owned banks involves three components: (1) the creation of a new management structure, named the Bank Restructuring Committee (BRC), for the state-owned banks; (2) the design and implementation by the BRC of a restructuring plan for the state-owned banks; (3) the preparation and execution of an ownership transfer of the state-owned banks to the private sector. The components may require more than two years to implement in full. Management Structure • In the first component, the BRC will be established as a new and independent management committee with broad power to determine the activities, operations, and structures of the six state-owned banks. Its members, appointed by the CPA Administrator, will design a bank restructuring plan, oversee the implementation of the plan, and provide strategic guidance to bank management. The boards of the two large state-owned banks will also be reorganized, with new members, to support the restructuring process. Restructuring Plan • In the second component, the restructuring plan for the state-owned banks will be designed and implemented by the BRC. It will include activities such as asset valuation, balance-sheet adjustments, the disposition of non-performing loans, a rationalization of the branch network, and new loan programs to enhance value. The four specialized state-owned banks will be consolidated and merged into the Rafidain Bank and/or Rasheed Bank at the outset of the restructuring process. Ownership Transfer • In the final component, the BRC will prepare for an ownership transfer of the state-owned banks to the private sector, by an appropriate date to be determined. premial buf and o erin maxinth vite sale pure the sals to recove restructuring costs and provide a fair return to the government. Restructuring Organization An essential feature of the restructuring process is the creation of a management entity, the BRC, that will guide planning and implementation. The BRC will design, manage, and oversee the restructuring process. However, the BRC will cease to exist when ownership of the restructured banks has been transferred to - 5 - Ministry of Industry and Minerals Information Se SOE Internal Audit Finance General Counse Technology 14 April 2004 Ministry of Industry and Minerals Information, SOE Sectors Finance Standards General Counsel Technology: 14 April 2004 Ministry of Industry and Minerals Shief of St trial gulatory #Information Internal Audit General Counsel andards Technology aining Program 14 April 2004 MIM "Holding Company" Produ Operations* Plannigg and Budgeting* Ancillary Operetions* MIG SCE Mixed Sectat MIM SOE empanies* ctor Direct S ector Director x 7 Sector® ALI SOES Sectors Strateg Sub-functions organized on a sectoral basis * Operational coordination Ministry of Industry and Minerals (MIM) Proposed Re-organizational Plan Submission from CPA MIM Planning Considerations MIM must restructure to deal with two concurrent missions (the twin pillars) in mind: • Performing as a holding company for State Owned Enterprises • Performing as a government agency responsible for industrial and mineral development. The former is short-term in nature (adjusted as privatization occurs)... the later is long term in nature (shall develop in time). MIM Planning Considerations MIM must restructure with Iraq's and the Ministry's future in mind: • Iraq becomes market oriented • The Ministry - Focuses on assisting the private sector in industrial and economic development - Becomes a leaner organization - Must manage an organizational transition (phased reorganization) MIM Organizational Proposal Ministry HQ Ministerial Staff Advisory Office/Council: Non Profit Corporation? Holding Company Development Agency * Deputy Minister Status ** Situational Option MIM Planning Considerations for the "Holding Company" MIM must establish an organizational capacity that is rational and efficient. As a holding company the following "Staff" recommendations are paramount: • Planning, Auditing, Investing and Budgeting are one Directorate - anything of a financial/resource nature should be consolidated and combined with planning - Identify ends, ways, means • Plans presented, assessed, discussed and approved prior to new fiscal year • Plans are assessed during the year and at years end to assess targets • SOE Core Operations should be consolidated in one Directorate: Role is to advise and assist the SOE management: - Technical Department - Sales and Marketing Department • SOE Ancillary Operations should be consolidated in one Directorate: Role is to advise and assist the SOE management: - Security - Legal - Administration MIM Planning Considerations for the "Holding Company" The following "Line" recommendations are paramount: • Establish Directorates for SOE Affairs to provide the Deputy Minister of the Holding Company a manageable span of control: - Mixed Sector SOE - MIM SOE - MIC SOE (former) • Sub-classify the Directorates of SOE Affairs on a sectorial basis (Current sector distinctions are adequate) MIM "Holding Company" Staff Functions Holding Company 1g and Finance Auditing Sub-functions organized on a sectoral basis * Operational coordination ** Financial and Production MIM Planning Considerations for the "Industrial and Mineral Development Agency" A meaningful Industrial and Mineral Development Agency should incorporate the following features: Mineral Resource Development: "Front end" for MIM's interaction with the private sector inside and outside of Iraq interested in developing Iraq's Mineral resources - Geological Survey: In addition maintain intelligence on mining industry/cluster knowledge both inside and outside Iraq. Capable deal makers on projects. Work closely with Mineral Promotion and Mineral Development Departments - Mineral Promotion and Marketing (mining and quarrying) - Industrial Development (salts, chemicals, minerals, nonmetallic minerals) - Program Management Industrial Development and Marketing: "Front end" for MIM's interaction with the private sector inside and outside of Iraq for industry's seeking public assistance - Strategic Industry Department: Maintain market intelligence on industry/cluster knowledge both inside and outside Irag. Capable deal makers on projects (financing, technical assistance, site location). This element could be organized either geographically, industrial/cluster basis or sub-classified in to heavy vs. light industry. Work closely with Industrial Promotion and Marketing and Industrial Development Department). - Industrial Promotion and Marketing - Industrial Development - focused on recruiting and retention (to include research and development) - Program Management MIM Planning Considerations for the "Industrial and Mineral Development Agency" (Continued) • Program Management - Programs in support of the Private Sector - Work force training programs (to work closely with Ministry of Labor) - Technical and Environmental programs - ISO - Business certification/bank lien filings Industrial Estates/Parks Care taker (oversee day to day operations) Planning and design • Develop infrastructure • Develop spec buildings or build to suit options - Investment development - Marketing MIM "Industrial and Mineral Development Agency" evelopment Agency Industriaf Estates Program M Migeral Development Industrial Developmer Development Agency integrates the activities of Geological Survey, Training and Development and Tanmia MIM "Industrial and Mineral Development Agency" Mineral Development: Geological Survey Marketing and Promotion Development Program Management Geglogical Survey Activities The DG of Geological Survey fulfills the role of DG of Mineral Development MIM "Industrial and Mineral Development Agency" Industrial Development Strategic Industry Program Management Marketing and Promotion Development Heavy Industries ight industries Could be organized on sector, cluster or geographical basis MIM "Industrial and Mineral Development Agency" Program Management ISO Work Force Training Technical/Environmental Business Certification MIM Planning Considerations for the "Industrial and Mineral Development Agency" ndustrial Estates/Bark Marketin •Caretaker Investment Planging and Des 200 millio An Endurit Be Burpst MIM Planning Considerations for the Non Profit Organization Non Profit organization: A means to manage the transition from what you are to what you can become (Iraq's premier industrial development agency) • A public-private partnership in Iraq's industrial and economic development - A new way not associated with the past • Advisory Council is Board of Directors • Investment and Development - Where investment decisions are staffed (both current practice and public sector assistance to private companies) - Conduct due diligence on companies seeking public sector financial assistance. - Work very closely with Development Agency to develop deals • Development Fund - An Industrial Development non bank, bank for Private and Public Sector Projects - Development fund accounting and auditing • Non Profit Corporation is not Civil Service (voluntary transfers or private sector hires) - A "professional staff' that must maintain itself from returns on investment • Development Fund - MIM surplus for 2004 transferred to NPC - Matched by Iraqi/Pan Arab private sector (Development Fund under discussion - Provides funding - debt financing or equity to companies - or grants to Development Agency.~ - Investment decisions no longer become SOE focused MIM Non Profit Organization Non Profit Corporati Advisory Council Development Fund nvestment and Developme Advisory Council serves as Board of Directors for Non Profit Organization Defend against conflict of interest Legal framework must define it as an association of the MIM Non Profit Corporation is not Civil Service (voluntary transfers or private sector hires) Must maintain itself from returns on Investment Development Fund MIM surplus for 2004 transferred to NPC Matched by Iraqi private sector Development Fund (under discussion... Sami and Shakir) Provides funding to private sector development (subordinated debt, etc.) Investment decisions no longer become SOE focus MIM Planning Considerations Ministerial Staff The Ministerial Staff will perform: • Special Staff Functions for the Ministry/Minister - direct access to the Minister - Inspector General - Public Relations - Legal • Coordinating Staff - directed by a Chief of Staff - Administration and Personnel Management - Logistics and services support - Operations MIM Ministerial Staff Ministerial Staff Coordinating Staff Special Staff (Chief of Staff) (Direct access to Minister): Personnel and Administration Inspector General Logistics and Services Suppo Public Relations Operations. Legal (Security, Plans, Operations, Training) MIM Planning Considerations Advisory Council The Advisory Council performs as: • The advisory office to the Minister • To coordinate the activity of a wider advisory council which meets periodically to make recommendations and suggestions to the minister. • To crystallize a vision for the Ministry, its role in the future. • The Board of Directors to the Non-Profit Organization • The Board of Directors of MIM developing its policies and future outlook and to review its investment decisions - The results of SOE activities and their investment decisions - Investment promotion of new industrial concerns The Advisory Council - mix of public and private sector with a preponderance of private • Three to be selected from the MIM staff (Minister and proposed Deputy Ministers) • DG's from various sectors Prominent members of the private sector, industrialists, banks, investors, industrial consultant, accountant and a lawyer - To avoid a conflict of interest board members must resign if they seek public assistance for personal projects - To avoid a conflict of interest members must abstain on voting on projects with a personal interest MIM Organizational Proposal Ministry HQ - Ministerial Staff Advisory Office/Council Non Profit Corporation *Holding Company Development Agency Advisory Council has a relationship to the Ministry and the Non Profit Corporation Piraclai MIM Organizational Proposal Concluding Thoughts • The MIM can incorporate current sub-functions as they see fit... • Only the two pillars is sacrosanct • The reorganization could be phased in - Implement the reorganization of the Holding Company and Ministerial Staff now - Form an Advisory Council now - Plan and coordinate the Development Agency • Integrate Geological Survey and Tanmia • Phase the implementation to accommodate personnel reassignments from the Holding Company - Plan and develop the Non Profit Corporation • Seek broad support from the private sector - Use the Advisory Council to develop a coalition of support for the GC and the Ministry of Finance (b)(6) Ministry of Industry and Minerals (MIM) Proposed Re-organizational Plan Submission from CPA MIM Planning Considerations MIM must restructure to deal with two concurrent missions (the twin pillars) in mind: • Performing as a holding company for State Owned Enterprises • Performing as a government agency responsible for industrial and mineral development. The former is short-term in nature (adjusted as privatization occurs).... the later is long term in nature (shall develop in time). MIM Planning Considerations MIM must restructure with Iraq's and the Ministry's future in mind: • Iraq becomes market oriented • The Ministry - Focuses on assisting the private sector in industrial and economic development - Becomes a leaner organization - Must manage an organizational transition (phased reorganization) MIM Organizational Proposal Ministry HQ Ministerial Staff Advisory Office/Council Non Profit Corporation* Holding Company Development Agency * Deputy Minister Status ** Situational Option MIM Planning Considerations for the "Holding Company" MIM must establish an organizational capacity that is rational and efficient. As a holding company the following "Staff" recommendations are paramount: • Planning, Auditing, Investing and Budgeting are one Directorate - anything of a financial/resource nature should be consolidated and combined with planning - Identify ends, ways, means • Plans presented, assessed, discussed and approved prior to new fiscal year • Plans are assessed during the year and at years end to assess targets • SOE Core Operations should be consolidated in one Directorate: Role is to advise and assist the SOE management: - Technical Department - Sales and Marketing Department • SOE Ancillary Operations should be consolidated in one Directorate: Role is to advise and assist the SOE management: - Security - Legal - Administration MIM Planning Considerations for the "Holding Company" The following "Line" recommendations are paramount: • Establish Directorates for SOE Affairs to provide the Deputy Minister of the Holding Company a manageable span of control: - Mixed Sector SOE - MIM SOE - MIC SOE (former) • Sub-classify the Directorates of SOE Affairs on a sectorial basis (Current sector distinctions are adequate) MIM "Holding Company" compan Product Operations Planning and Budgeting Ancillary Operations Ixed 'Sector Companies Sub-functions organized on a sectoral basis * Operational coordination MIM "Holding Company" Staff Functions Holding Company Sub-functions organized on a sectoral basis * Operational coordination ** Financial and Production ---- MIM Planning Considerations for the "Industrial and Mineral Development Agency" A meaningful Industrial and Mineral Development Agency should incorporate the following features: Mineral Resource Development: "Front end" for MIM's interaction with the private sector inside and outside of Iraq interested in developing Iraq's Mineral resources - Geological Survey: In addition maintain intelligence on mining industry/cluster knowledge both inside and outside Iraq. Capable deal makers on projects. Work closely with Mineral Promotion and Mineral Development Departments - Mineral Promotion and Marketing (mining and quarrying) - Industrial Development (salts, chemicals, minerals, nonmetallic minerals) - Program Management • Industrial Development and Marketing: "Front end" for MIM's interaction with the private sector inside and outside of Iraq for industry's seeking public assistance - Strategic Industry Department: Maintain market intelligence on industry/cluster knowledge both inside and outside Iraq. Capable deal makers on projects (financing, technical assistance, site location). This element could be organized either geographically, industrial/cluster basis or sub-classified in to heavy vs. light industry. Work closely with Industrial Promotion and Marketing and Industrial Development Department). - Industrial Promotion and Marketing - Industrial Development - focused on recruiting and retention (to include research and development) - Program Management MIM Planning Considerations for the "Industrial and Mineral Development Agency" (Continued) • Program Management - Programs in support of the Private Sector - Work force training programs (to work closely with Ministry of Labor) - Technical and Environmental programs - ISO - Business certification/bank lien filings Industrial Estates/Parks Care taker (oversee day to day operations) - Planning and design Develop infrastructure • Develop spec buildings or build to suit options Investment development Marketing MIM "Industrial and Mineral Development Agency" Industrial Estates Industrial Development Mineral Develogmen Development Agency integrates the activities of Geological Survey, Training and Development and Tanmia MIM "Industrial and Mineral Development Agency" Mineral Development* Geological Survey Marketing and Promotion Development Program Management Geological Survey Activities The DG of Geological Survey fulfills the role of DG of Mineral Development MIM "Industrial and Mineral Development Agency" Industrial Development Program Management Developmen Marketing and Promotion Strategic Industri Heavy Industries Light Industrie Could be organized on sector, cluster or geographical basis MIM "Industrial and Mineral Development Agency" Program Mana /ork Foree. nical/Environmental Busine MIM Planning Considerations for the "Industrial and Mineral Development Agency" industrial Estates/Parks Caretake Planning and Design larketing lovesiment: MIM Planning Considerations for the Non Profit Organization Non Profit organization: A means to manage the transition from what you are to what you can become (Iraq's premier industrial development agency) • A public-private partnership in Iraq's industrial and economic development - A new way not associated with the past • Advisory Council is Board of Directors • Investment and Development - Where investment decisions are staffed (both current practice and public sector assistance to private companies) - Conduct due diligence on companies seeking public sector financial assistance. - Work very closely with Development Agency to develop deals • Development Fund - An Industrial Development non bank, bank for Private and Public Sector Projects - Development fund accounting and auditing • Non Profit Corporation is not Civil Service (voluntary transfers or private sector hires) - A "professional staff" that must maintain itself from returns on investment • Development Fund - MIM surplus for 2004 transferred to NPC - Matched by Iraqi/Pan Arab private sector (Development Fund under discussion - Provides funding - debt financing or equity to companies - or grants to Development Agency - Investment decisions no longer become SOE focused MIM Non Profit Organization in Profit Corporatio Advisory Councili Investmentiand Developmen Development Fund a Advisory Council serves as Board of Directors for Non Profit Organization Defend against conflict of interest Legal framework must define it as an association of the MIM Non Profit Corporation is not Civil Service (voluntary transfers or private sector hires) Must maintain itself from returns on Investment Development Fund MIM surplus for 2004 transferred to NPC Matched by Iraqi private sector Development Fund (under discussion... Sami and Shakir) Provides funding to private sector development (subordinated debt, etc.) Investment decisions no longer become SOE focus - MIM Planning Considerations Ministerial Staff The Ministerial Staff will perform: • Special Staff Functions for the Ministry/Minister - direct access to the Minister - Inspector General - Public Relations - Legal • Coordinating Staff - directed by a Chief of Staff - Administration and Personnel Management - Logistics and services support - Operations MIM Ministerial Staff Migisterial Staff Special Staff: Coordinating Staff (Directraccess to Minister (Chief of Start inspector General Personnel and Administration Rublic Relations Logistics and Services Suppor Operations (Security, Plans, Operations, Training) MIM Planning Considerations Advisory Council The Advisory Council performs as: • The advisory office to the Minister • To coordinate the activity of a wider advisory council which meets periodically to make recommendations and suggestions to the minister. • To crystallize a vision for the Ministry, its role in the future. • The Board of Directors to the Non-Profit Organization • The Board of Directors of MIM developing its policies and future outlook and to review its investment decisions - The results of SOE activities and their investment decisions - Investment promotion of new industrial concerns The Advisory Council - mix of public and private sector with a preponderance of private • Three to be selected from the MIM staff (Minister and proposed Deputy Ministers) • DG's from various sectors • Prominent members of the private sector, industrialists, banks, investors, industrial consultant, accountant and a lawyer - To avoid a conflict of interest board members must resign if they seek public assistance for personal projects - To avoid a conflict of interest members must abstain on voting on projects with a personal interest MIM Organizational Proposal Ministry HQ Ministerial Staff Advisory Office/Council Non Profit Corporation Development Agency "Holding Company Advisory Council has a relationship to the Ministry and the Non Profit Corporation MIM Organizational Proposal Concluding Thoughts • The MIM can incorporate current sub-functions as they see fit... • Only the two pillars is sacrosanct • The reorganization could be phased in - Implement the reorganization of the Holding Company and Ministerial Staff now - Form an Advisory Council now - Plan and coordinate the Development Agency • Integrate Geological Survey and Tanmia • Phase the implementation to accommodate personnel reassignments from the Holding Company - Plan and develop the Non Profit Corporation • Seek broad support from the private sector - Use the Advisory Council to develop a coalition of support for the GC and the Ministry of Finance - • - - Strategic Plan - MIM 1. Restructuring - The Ministry of Industry and Minerals envisions transitioning from a holding company of state owned enterprises (SOE) to an Industrial Development Agency. The MIM has developed a conceptual restructuring plan (with organizational chart). Critical to this restructuring is disposing of the SOEs (privatizing, liquidating, restructuring). Its short term objectives including privatizing the management of the SOEs through leasing programs. The Ministry's goal is to achieve its SOE disposition within 2-5 years. A rationaly organized short term holding company will be established to manage the operations of the SOE. 2. Industrial Development - Essential to the above transformation is the Ministry's evolvement into an Industrial Development Agency. The Ministry will embark on industrial park development and establish industrial development program activities to assist the private sector in business development and to attract foreign direct investment. With private competition many of these firms will eventually disapear. The Ministry is moving toward establishing public-private partnerships and organizations to provide strategic and operational guidiance to the Ministry. 3. Management - The Minister anticipates that the necessary restructuring will require a substantial change in the DG leadership of the Ministry. In addition a substantial training program is necessary to reorient the staff from a socialist/planned economic model to a market oriented economic model as the means to develop the Iraqi economy 4. Economic Development - the immediate goal of the Ministry is to get select SOE's operational as soon as possible. The IPP i(and other electricity sources) is essential to this process. The leasing program will assist some of the marginal firms to achieve meaningful production levels. Chief Information Officer Iraq 29 April 2004 Ministry Of Communication The office of the CIO is to Consolidate IT requirements and standardize IT procurements at the PMO Step3 Step2 Step1 Prioritize & Standardize Procurement: Categorize requirements: Conduct an inventory of IT - Short term - Applications requirements for the Ministries - Long term - Infrastructure & Architecture - Open standard / Microsoft affice suite - Organization & Operations - Training LLAN Ministry ClO Accounting/GL Ministry CIO VSAT Internet Applications Email Email Email HR/Payroll HR/Payroll Short term Data Center Accounting/GL LAN LAN Req. Analysts WAN WAN Infrastructure & Architecture VSAT Training Internet PMO Procurement Standards 1334665512" HR/Payroll Internet: Long term Ministry CIO Accounting/GL Organization Req. Analysts WAN - VSAT & Operations L Training Ministry Ministry Ministry 2 Ministry Of Communication 29 April 2004 Office of the CIO plan milestones 1. Issue CIO standards for PMO procurement 2. Work with Ministries to : a. Inventory IT requirements b. Plan Ministry connection to the network 3. Assess Ministry and Ministry-CIO training requirements 4. Develop internet portal for the Iraqi Government 5. Work with PMO to provide oversight over procurement standards a. Setup shadow CIO office at PMO b. Establish 2 national data centers 3 Ministry Of Communication 29 April 2004 Government Connectivity - WBB - Baghdad • Point-to-point wireless solution for key locations and infrastructure • Complements/replaces VSAT interim solution Commercial - of Health Area of Baghdad SHATTH HA mistry BAGHDAD änk Statie ald. Pedia idastial Hospttal Min ot Trad Baghdad Int. alian Airport mbassy Baghdad Univ. International Airport Ministry Of Communication 29 April 2004 Government and Other Connectivity - Baghdad • WiMax Overlay (point-to-multipoint) for greater service area coverage Example Rollout 9 Microwave Nodes 5 WiMax OFDM Cells KH HAMID 40,000+ user initial capability BAGHDAD End user speeds >1.5mbps First links (i.e. ministries) operational within 90 days of funding Ubiquitous service capability for metro-Baghdad Internationa Airport 5 29 April 2004 Ministry Of Communication MoC/CIO/Ministry Relationships Global Internet: Service Providers Ministries Spacelink GOIC Global Internet: Ministry 1 Mail Router Router Satellite SCIS/VEGA WEB etc Ethernet Satellite Switch Radius Servers: DNS, Workstations Server IP Address Broadband: wireless, fiber OR Ministry 2 ITPC Mail Router SCIS Router WEB etc IP Ethernet Switch Broadband: wireless, fiber Future Radius Workstations Servers: DNS, Server IP Address 6 Ministry Of Communication 29 April 2004 CIO Function • Iraqi CIO: - Cross functional (IT across ministries) - Sets standards; provides guidelines - Develops future vision for Iraqi gov't IT • PMO CIO "Shadow Function" - Executes vision - Builds to Iraqi ClO Approved Standards Economies of Scale (combine like reqmts) - Works across all sectors - Coordinates projects with Iraqi CIO - For Trans/comm sector: "more of the same" 7 Ministry Of Communication 29 April 2004 kpmg Iraqi Cement Company (Draft) Financial Assessment Report December 2003 This report contains 54 pages and 4 appendices Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 Contents 1 Introduction 1 1.1 Background 1 1.2 Scope of engagement Scope restrictions 2 1.3 Approach and procedures 1.4 1.5 Other issues 2 Executive summary 2.1 Current status in Iraq 2.2 Overview of ICC Key business issues 2.3 2.4 Key financial issues 2.5 Business opportunities 2.6 Projections for the year 2004 3 14 Operating structure and activities 3.1 Operations 14 3.2 Company structure and employee 4 17 Summary combined financial statements Basis of preparation 17 18 summary combined income statement Summary combined balance sheet 19 Iraqi Accounting Standards 20 5 21 Analysis of summary combined balance sheets Tangible fixed assets 21 Assets under construction 26 Financial investments 27 28 Inventory Trade receivables 30 Cash 32 34 Trade accounts payable 36 Dividends payable 37 Bank loans 38 Capital and reserves This document is private and confidential and is to be read and used only in the contex of the current status of the Iraqi Cement Companv. It is not to be copied or distributed without KPMG's brior written consent. aqi Cement Compa raff) Financial Assessme kpmg December 2003 41 6 Commitments and contingent liabilities Commitments 41 6.1 41 6.2 Contingent liabilities 42 6.3 Claims and litigation 7 43 Capital Investments 44 8 Sales Cycle Description and Cash Controls Sales 44 8.1 45 8.2 Petty Cash 8.3 45 Salaries 46 Cheques - Received 8.4 8.5 47 Cheques - Issued 8.6 47 Bank Accounts 9 49 Management Letter Comments 10 50 Management Assessment 50 10.1 Introduction 10.2 50 Management - General issues 50 10.3 IT management 10.4 Accounting Department 50 51 10.5 Production Engineers Appendices: Engagement letter. Appendix 1: Appendix 2: 2002 summary balance sheet and income statement by plant Projected financial information for 2004 Appendix 3: "Status update" of 22 November 2003 Appendix 4: This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 1 Introduction Background 1.1 In November 2003, KPMG Bahrain (hereafter, "KMG") were requested by the Ministry of Industry and Minerals (hereafter "MIM") and the Coalition Provisional Authority (hereafter "CPA") to complete certain procedures on Iraqi Cement Company (hereafter "ICC" or "the Company"). 1.2 Scope of engagement Details of the procedures completed are set out in our engagement letter, as shown in appendix 1, and related findings are set out in this report. The engagement has been carried out in accordance with the terms set out in our engagement letter dated 12 October 2003 as shown in appendix 1. This report documents our findings based on fieldwork performed from 17 November 2003 to 3 December 2003, inclusive. The primary purpose of this report is to assist MIM and CPA in their assessment of the current status of ICC by performing certain agreed upon procedures. The procedures we have undertaken are limited in nature and extent to those which MIM and CPA have determined will best suit their needs and as such will not necessarily disclose all significant matters about ICC or reveal irregularities, if any, present in the underlying information. The procedures we have undertaken during the course of the engagement do not constitute an audit. Accordingly, we do not express any opinion as to the accuracy or completeness of the information included in this report. Had such audit(s) been undertaken, then our findings could differ from the information presented herein. We have no responsibility to update this report for transactions and events occurring after the completion of our fieldwork on 3 December 2003. We were requested under the terms of this engagement to assist ICC in the preparation of Prospective Financial Information ("PFT") for the 12 month period ending 31 December 2004 as set assumptions will need to be reviewed and revised to reflect such changes in trading patterns, cost of the projections. Since the forecasts/projections relate to the future, actual results are likely to be different from the projected results because events and circumstances frequently do not occur as expected, and the differences may be material. 1 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Compan. It is not to be copied or distributed without KPMG's prior written consent. kpmg December 2003 1.3 Scope restrictions 13.1 Preparation of 2003 balance sheet MIM requested that KPMG prepare a balance sheet as at 31 August 2003 as detailed in our engagement letter attached in appendix 1. MIM informed us that the necessary information would be available for 2003 to enable KPMG to perform this work. This was also confirmed to us by ICC. However while performing our work, we encountered the following significant limitations in information available to us: • No general ledger, sub-ledgers or interim financial statements for the year 2003 were available; • We understand that the accounting records for the pre-war business activities of ICC were recorded and maintained at the Head Office. After the war, the accounting records have only been maintained on a factory by factory basis. For 2003, the factories were only able to provide us with the monthly net debits/credits per factory which is not sufficient to be able to compile a balance sheet as requested by MEM; and A • We were provided with limited access/ to ICC staff largely due to their current working hours during the Ramadan period (9:00-12:45 each working day) and the fact that Fridays are a holiday. In addition, our work was performed during the Eid holiday where the premises were closed for 3 days. It should be noted that these potential access limitations had been raised with MIM and the Coalition Provisional Authority (hereafter "CPA") prior to our field visit and we had been assured that appropriate members of ICC staff would be available to assist us. Due to the above restrictions, we were unable to prepare a balance sheet for 2003 as requested by MIM in our engagement letter attached as appendix 1. On 22 November 2003, we submitted a "status update" to Rick Ortiz, Senior Advisor to MIM, which we understand was distributed to the interim Minister of MIM, ICC and the CPA. This status report stated that in the absence of any financial information for the year 2003, we would prepare a summarized balance sheet as at 31 December 2002. This report should be read in conjunction with the "status' report referred to above and attached as appendix 4. Limited discussions and field visits 1.3.2 In addition, it should be noted that we were unable to visit two of ICC's four plants, those located in Al-Qaim and Kubaissa, due to security issues in those areas. As a result, the points raised in this report are mainly based on discussions with management of and field visits to ICC's head office and _2 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cemens Compar. It is not to be copied or distributed without KPMG's brior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 1.3.3 Inventory and fixed asset counts During our visit to the two factories and the Head Office, we have performed a physical count and/or observation of the inventory and fixed assets. However no accounting records were available to compare our results to the books. 1.4 Approach and procedures Our approach to this engagement involved the performance of the following procedures: • Inspecting the 2002 long form audit report issued by Iraq's Supreme Board of Auditors; • Inspecting the ICC general ledger and certain supporting documents for the financial year 2002; • Field visits to two factories (Fallujah and Kirkuk) and the Head office of ICC; • Holding discussions with ICC senior management at ICC's Head Office; • Holding discussions with financial management of the four factories and the Head Office of • Holding discussions with the head of ICC's planning department; and • Holding discussions with the head of ICC's-legal department. Other issues 1.5 Management of ICC have not read this report, nor have they verified the factual accuracy of the information contained herein, or provided us with any written representations in this regard. All monetary figures in this report are presented in Iraqi Dinars (ID), thousands of Iraqi Dinars ("ID_k"), millions of Iraqi Dinars ("ID _mn") or billions of Iraqi Dinars ("ID_bn"). As of 3 December 2003, the current market exchange rate between the Iraqi dinar and the US Dollar was ID 2,000 to USD 1. We have not performed any legal, technical or environmental assessments on ICC as this was outside the scope of our engagement. This report, including all parts thereof, is provided on the basis that it is for the internal information of MIM and ICC only and that it will not be distributed, published or referred to, in whole or in part, without our prior written consent. Should the report or parts thereof be reproduced, MIM or ICC must have KPMG review and agree in writing to the context in which the reproduced part of the report is to be used. 3 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Drafi) Financial Assessmen December 2003 2 Executive summary 2.1 Current status in Iraq State of conflict 2.1.1 At the beginning of May 2003 the conflict between the Coalition Forces and Iraq ended by the removal of Saddam Hussein and the Baath party from power. Post conflict problems for Iraqis are un-employment, looting, crime and security. It is acknowledged that over the past few months the security of iraqi people has improved. However during the past months the Coalition Forces and the Coalition Provisional Authorities have been facing mounting attacks against their troops and their (sub) contractors. President George W. Bush, United Nations and the world's Islamic nations (during its Triennial Arab Summit of 16-17 October 2003) have pledged to fight terrorism and to support the Iraqi people. Governing authorities 2.1.2 The adoption of the U.N. Security Council Resolution 1483 on 22 May 2003 marks a turning point in the historical pages in Iraq. It ends nearly 13 years of economic sanctions, encourages the international community to support Iraqis reconstruction, and supports the establishment of a transitional administration run by Iraqis. The resolution recognizes the authority of the Coalition Forces under the Fourth Geneva Convention as an "occupying power" (or Coalition Provisional Authority"). The CPA has the rights and obligations to take the lead during the interim period, not only in reconstructing and rebuilding Iraq in the near-term, but also in creating a process by which Iraqis can choose their future government. Unanimous adoption of the U.N. Security Council Resolution 1511 on 16 October 2003 confers U.N. legitimacy to US-led operations in Iraq. On 13 July 2003 an Interim Governing Council was formed and subsequently recognized by the U.N. resolution 1511. They have recently approved to hold democratic elections of a governing body by June 2004. 2.1.3 Iraq's economy According to the World Bank (WB), Iraq's economy will shrink 22 percent this year, having fallen 21% in 2002 and 12% in 2001. Average income fell from $3,600 per person in 1980 to $770-1,020 in 2001 and just $450-610 by the end of 2003. However, with its huge oil and gas reserves, virtually unlimited supplies of water (the Tigris and Euphrates rivers) and a large well-educated population, Iraq, is expected to re-emerge as an important economic and hence political force in the Arab world. Iraq has a proven oil reserve of around 113bn barrels and a probable reserve of 220bn barrels. Saudi Arabia and Russia hold the world's largest proven reserves of around 270bn barrels each. According to 1997 figures, Iraq has proven gas reserves of 3,000bn cm. The oil minister has stated that Iraq has the potential to become the world's second or third largest holder of gas reserves. 4 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draf) Financial Assessment December 2003 2.1.4 Future expected political and economic developments The prospect of a stable, democratic, market based economy in a region relatively unattractive for Foreign Direct Investment is promising. Senate and US House representatives have recently approved a budget of $87bn to finance war against terrorism and for reconstruction of Iraq and Afghanistan. $18 billion of this has been allocated mainly to the reconstruction of Iraqi infrastructure. Other countries at the Donors' conference of October in Madrid for Iraqi reconstruction committed an additional $17bn. In addition, Paris Club has recently stated that it would consider canceling part of Iraq's $40bn debt. Reconstruction and development of the oil and gas industry could also contribute significantly to the Iraqi economy. Over the past few months the Coalition Provisional Authority have passed a number of measures to allow an acceleration of the modemization of the iragi economy. These included the following: • CPA no 39 allows foreign investors to set-up. a frade office, a branch, a subsidiary or a joint venture, or to acquire an investment in all sectors except banks, insurance companies or natural resources. Authorization was granted to repatriate frid. • CPA no 37 reduces- substantially the level of taxation and sets the maximum tax rate on individual and corporate income át 15% as from 1 January 2004. • CPA no 18 sets measures to ensure the independence of the Central Bank of Iraq. • CPA no 20 establishes a Trade Bank of Iraq to provide financial services to facilitate import and export of goods and services. • CPA no 40 set a new banking act in accordance with western practice. Total number of licences for banks controlled by foreigners is limited to six banks through 31 December 2008. 5 This document is private and corfidential and is to be read and used only in the context of the current status of the Iraqi Cement Compan. It is not to be copied or distributed without KPMG's prior written consent. - - - aqi Cement Compar kpmg Draft) Financial Assessme December 2003 Overview of ICC 2.2 Background 2.2.1 1Ce ath payd in 1964 through the merger of three cement companies and their nationalization by ICC's core activities are the production and sales of cement through its four plants located in central Iraq. ICC's market share is approximately one-third of the Iraqi market. Financial highlights 2.2.2 The financial highlights of ICC as at and for the years ended 31 December 2002 and 2001 are set out in the table below: 2002 2001 (Expressed in thousand of Iragi Dinar) i (unaudited) (unaudited) 38,925,313 48,506,845 Total revenues Ar 11,216,078 Net profit for the year 17,539,096 2,235,000 wa Volume produced in tons n/a 21,703 Average price per ton 8,820,716 Net equity. 8,327,738 Source: Prepared by KPMG based on the general ledgers of ICC. n/a- not available. 6 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Compar. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 2.3 Key business issues The key business issues which came to our attention during the performance of our procedures are summarized below: 2.3.1 Security issues The ongoing security issues throughout Iraq are detrimental to the Company's business and have the following key effects: • Misappropriation of the physical assets; • Delayed travel for employees going to work at the plants from their homes in the cities; • Additional security costs incurred for the business; • Delays in the transportation of ray materials and spare parts; and • A lack of access to international expertise. 2.3.2 Lack of electricity Currently, ICC does not have electricity to operate their production lines. As a result, since the end of the war, ICC's four plants have either not been operational or been operating on severely limited basis. We understand that ICC management is currently considering the purchase or leasing of electricity generators in order to secure at least a minimum electricity supply. 2.3.3 Cement demand Currently, significant cement imports are being made from Iraq's neighboring countries. As a result the selling price per ton of cement has considerably increased, from approx. US$ 10 per ton before the war to currently over US$ 40-60 per ton. 7 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 Condition of ICC's facilities 2.3.4 ICC's production facilities were constructed over 20 years ago and are therefore old and in need of repair and modernisation; There has been a lack of proper maintenance of fixed assets in ICC since the 1991 Gulf War resulting: • Poor production efficiencies and wastage of raw materials; • High consumption of energy; and • Significant capital expenditure required in the future to restore maximum capacity. Human resource issues 2.3.5 Due to the war, ICC's highly qualified technicians have either fled the country or were recruited by private companies. The hiring and training of technicians for the plants should be a key focus area for the Company in the future. Financial management and staff require extensive training and guidance for ICC to be able to operate in and make the transition to a market economy. 2.3.6 Supplies Raw materials, electricity, oil and transportation prices as well as salaries are in the process of being liberalized. Raw materials used in ICC's production process (i.e. limestone, clay, iron ore and gypsum) have to be transported long distances to the plants. As a result, transportation costs are high and there are frequent cases of supplies not arriving at all. _8 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Compan. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Drafi) Financial Assessment December 2003 2.4 Key financial issues Set out below are some of the key financial issues identified as a result of our work: 2.4.1 Historical cost of production facilities The historical cost of the four production facilities of ICC was over USD 700 million. The current book value in ID is based on historical exchange rate for imported goods. However, if the current exchange rate is applied, then the net book value of the fixed assets of ICC as at 31 December 2002 amounts to USD 7 million. To ascertain the market value of the production facilities, we would propose that a valuation is performed taking into consideration the technical condition of the assets, the completeness of the assets and their potential market value in a post-war Iraq. 2.4.2 Frozen monetary assets and liabilities Under [rule/law ROBERT], all monetary assets and liabilities from the pre-war period have been frozen. It is uncertain as to when the blocking of these assets and liabilities will be lifted and to what extent these assets and liabilities will still exist when the restrictions are lifted. Grants 2.4.3 ICC has general reserves included in its 2002 equity of ID 16,5 bn which relate primarily to cash granted by the former Iraqi government for carrying out capital improvements. It is uncertain in a post-war Iraq whether these funds will be required to be repaid. Other reserves 2.4.4 Included in ICC's equity in 2002 is a research & development reserve of ID 0.9 bn and a social reserve of ID 0.9 bn, which has been created from the income of ICC in prior years. Before the war, these reserves were to be paid to governmental institutions. Post-war, it is uncertain whether these reserves will still be required to be paid to these institutions. In any cases, until this issue is resolved by the new Iraqi government, these reserves should be recorded as liabilities of the Company. IT limitations 2.4.5 The IT mainframe in place in 2002 is in the process of being changed to a PC based system provided by MIM. The mainframe has several system failures and the PC based system is not functioning properly at this time. As a result, limited information is available to ICC management to manage the business. 9 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. - - Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 2.4.6 Adjusted net equity at 31 December 2002 2.4.6.1 Quantifiable adjustments A senter of ur probed anifiable acousing adjustments to IC's combined equity as at 31 Ref. (Expressed in thousands of Iragi Dinar) 31 December 2002 28,820,716 Net combined equity of ICC as reported by management Proposed adjustments: 1 Financial investments 5.3 (40,000) 5.4 (200,000) 2 Unused bags in Head Office for long period 3 (445,000) Receivables from institutions linked to Saddam ]5.5 5.6 4 Unrecoverable deposit in transit (3,000,000) 5 Reclassification of general reserves 5.10.3 (16,432,267 (964,439) 5.10.3.1 6 Reclassification of research and development reserves 5.10.3.1 (886,919) 7 Reclassification of social reserves 8 Unquantifiable adjustments c 2.4.6.2 NQ Adjusted combined equity 6,852.091 Source: Prepared by KPMG. NQ - not quantifiable. Details of each adjustment áre set out in the body of the report as referenced above. its hould be note of at the combined eguy prose ted alive reasonia the or yanti ans and information was not available to us. he total effect of our quantifiable adjustments is to reduce the net equity of ICC by Iragi Dina 1,968,625k from Iraqi Dinar 28,820,716k to Iraqi Dinar 6,852,0911 10 This document is private and confidential and is to be read and used only in the context of the current status of the iraqi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 2.4.6.2 Non-quantifiable adjustments It should be noted that in addition to the above quantifiable adjustments, further adjustments may be required in respect of other issues for which we were not provided with sufficient information. A summary of these issues is set out below, further details of which can be found in the body of this • Amount of looted assets in warehouses in Baghdad and the plant in Kirkuk; • Adjustments as a result of the IT system failure especially in the accounting of fixed assets; • Adjustments as a result of "real" exchange rate fluctuations and historical "fixed" exchange rates used; • Valuation of land and properties owned by the company 11 • Impairment of fixed assets; coverbity of re a money as and useding housand dosis. • Obligations to pay pre-war monetary liabilities; • Inter-divisional margins in inventory; • Write-off of looted cash; / • Interest and penalties on loans from Al-Rafadian bank; • Obligations to repay CPA in the future for staff costs currently paid by the CPA; • Outstanding litigation against ICC; and • Ownership of fixed assets. For further contingent issues to be taken into consideration, see section 6. This document is private and confidential and is to be read and used only in the context of the current starus of the iragi Cement Companv. It is not to be copied or distributed without KPMG's brior written consent. raqi Cement Compar kpmg Draft) Financial Assessme December 2003 Business opportunities 2.5 During our work, we have noted the following areas which may represent significant strengths and opportunities for ICC in the future: • Leadership qualities of the Director General; • ICC's plants have not been "looted" except for some vehicles, small equipment and stock in Baghdad; • There is a high demand for ICC's products at the moment in Iraq; • t in the note cited rey time i on into die color in pred goods; * in spor the cores eping uper i to aer ad am the which is hima due reo the • ICC has comparatively low production costs of less than USD 10-15 per ton; • The quality of ICC's products is well-recognized in the region; • ICC has managed to retain a large number of its employees from the pre-war period; and • ICC management have informed us that the Company could realize a limited productio apacity within a short period of time and without major capital investment 12 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draff) Financial Assessment December 2003 2.6 Projections for the year 2004 We have assisted ICC management in the preparation of prospective financial information for the 12 month period ending 31 December 2004 as set out in appendix 3. The following assumptions have been applied by ICC management to prepare these projections: • The annual production in 2004 is estimated at 1.6 million tons of cement i.e. approx. 33% of the designed capacity. • The total investment required over the next few years is estimated at USD 60 million. Half of this amount is expected to be invested in 2004 mainly for the acquisition of three generators for electricity and gear boxes for the mills. However these investments are not expected to improve the level of production but only to restart the production, Additional investments will be required to reach the maximum level of designed capacity of 4.8 million tons of cement. • The average selling price is projected at USD 40 per ton and the production costs, on a full absorption basis, at around USD 30 per ton. • Productivity gain or costs reduction have not been factored in the 2004 projections as it will require a detailed review and an implementation plan. • Substantial increases in the purchase price of raw materials have been projected due to the expected liberalization of prices. We must emphasise that the realisation of the forecasts/projections as prepared by ICC is dependent on the continuing validity of the assumptions on which they are based. The assumptions will need to be reviewed and revised to reflect such changes in trading patterns, cost structures or the direction of the business as emerge. We accept no responsibility for the realisation of the projections or the validity of the assumptions of ICC management especially given the general uncertainty, both politically, socially and economically in Iraq at the current time. Since the forecasts/projections relate to the future, actual results are likely to be different from the projected results because events and circumstances frequently do not occur as expected, and the differences may be material. 13 This document is private and confidential and is to be read and used only in the context of the current status of the iraqi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. - Iraqi Cement Compary (Draft) Financial Assessment Kpmg December 2003 3 Operating structure and activities Operations 3.1 Activities 3.1.1 ICC produces and sells cement from its four plants located in central Iraq. The cement is primarily designed for domestic use. In addition, ICC have two warehouses in Baghdad which will need to be upgraded and refurbished due to heavy "looting" after the war. In addition, the Company extracts raw materials for some of its plants from its quarries. 3.1.2 Suppliers 3.1.3 - _ ICC's suppliers of raw materials and services are Iraqi companies while for equipment, machinery and spare parts, ICC rely on international suppliers. Payments and receipts 3.1.4 ICC realizes sales and makes purchases primarily through cash advances in the form of certified cheques. However it should be noted that since the war ended, direct wire transfers are increasing. Production facilities 3.1.5 he Company's plants are not operating at this time due to a lack of electricity. ICC manageme dicated that the plants could operate with a limited capacity within a short period of time sufficient power was made available. ICC management indicated to us that the Company's production capacity could be significantly increased if appropriate capital improvements were made. Due to U.N. restrictions since 1991, there has been a lack of proper spare parts and trained international technicians available to ICC and as a result the plants have not been adequately maintained. 14 This document is privale and confidential and is ta be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 3.2 Company structure and employee 3.2.1 Legal status raqi Cement Company is a state-owned company and has four production plants located in centre f Iraq with its Head Office in Baghda 3.2.2 Overview of ICC corporate structure Set out below is a brief overview of ICC's corporate structure: Director General (DG) Head Office - Kirkuk Plant Kubaissa Plant Fallujah Plant Al-Qaim Plant 2 lines Baghdad 2 lines 1 line 3 lines + 1 old 515 employees 625 employees 460 employees 720 employees 464 employees On 31 October 2003, ICC had a total number of employees of 2,784 with salary expenses of USD 313,900 per month currently paid by the CPA (average monthly salary of USD 113 per employee). 15 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. kpmg Drop area Commen December 2003 3.2.3 Overview of ICC's Head Office organizational structure Set out below is an overview of ICC's organizational structure at its Head Office: Mohammed Abd-Allah Mohamed Director General ("DG") Deputy DG Deputy DG Maintenance R&D Planning Legal Managerial 100 employees 10 employees 5 employees 40 employees 118 employees Internal control Commercial Accounting Marketing Quality control 24 employees 69 employees 20 employees 50 employees 10 employees ISO IT Engineering 3 employees 50 employees 33 employees Source: ICC management. 16 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Compar. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 4 Summary combined financial statements 4.1 Basis of preparation The combined income statements and balance sheets presented in this section have been prepared in accordance with Iraqi Accounting Standards. There are significant differences between Generally Accepted Accounting Principles in the United States of America and the Iraqi Accounting Standards. umbination of me tour iro on prants sath tend thee ree wid but eliminaring in the divisional transactions and balances. ICC management indicated to us that inter-divisional transactions and balances have not been eliminated due to the fact that the final financial statements for the year ended 31 December 2002 were not completed prior to the start of the war. As this combined information is all that was made available to us, we have based our procedures and findings as set out in this report on the combined totals. The long form audit report issued by the Supreme Board of Auditors (government auditors) included financial statements for the year ended 31 December 2002 and management letter comments. There are a significant number of comments and proposed adjustments made by the auditors which have not been addressed or recorded (see section 9 for further details). he proposed adjustments resulting from our work as summarized in paragraph 2.4 of this report ar lot recorded in the combined balance sheets and income statements presented below 17 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company (Drat) Financial Assessment kpmg December 2003 Summary combined income statements 4.2 out combined income stalements of IC for the years ended 31 December 2002 and 2001 are set 2001 Ref. 26 2002 (unaudited) (unaudited) (Expressed in thousands of Iraqi Dinar) Turnover 48,506,845 38,925.313 N/A (24,308,425), Raw materials and consumables N/A 24,198,420 Gross Profit 49.9% Gross profit % Operating expenses Wages and salaries (6,477,557) N/A N/A External services (3,424,072) N/A Depreciation (803,909) N/A Capitalized costs 6,003,507 N/A Operating profit 19,496,389 $ 40.2% Operating profit % RAI Interest expense (348,751) N/A N/A Other expenses (1,608,541) Net income before ta? 11,216,078 17,539,097 Income tax 17,539,097 Net profit for the year 11.216,078 Source: prepared from ICC's combined 2002 & 2001 general ledgers. N/A - not available 18 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be copied or distributed without KPMG's brior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 4.3 Summary combined balance sheets The combined balance sheets of ICC as at 31 December 2002 and 2001 are set out below: Ref. 2002 2001 (Expressed in thousands of Iragi Dinar) (unaudited) (unaudited) Fixed assets Tangible fixed assets 5.1 15,006,130 2,602,276 Assets under construction 5.2 95,574 4,089,126 Financial investments 5.3 40,000 40,000 19,13.5.256 2,737.850 Current assets Inventory 38,180,224 5.4 30,063,164 Receivables 4,253,929 1,079,480 Cash 17,999,891 34.317,093 47.259,595 Current liabilities (Amounts falling due wi one year 7 Payables 5. 16,635,552 5,884,503 5.8 Dividends payable 16,948,206 13,512,011 Overdraft 3,981,692 23,378,206 33.583,758 Net current assets 13,675,837 10,938,886 Long-term liabilities (Amounts falling due after one year) Bank loans 5.9 3,990,377 5,349,000 Net assets 28,820,716 8,327,736 Capital and reserves 5.10 Share capital 1,523,000 1,523,000 Reserves 6,804,738 27,297,716 28,820,716 8,327,736 Source: prepared from ICC's combined 2002 & 2001 general ledgers. 19 This document is private and confidential and is to be read and used only in the context of the current stars of the Iragi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. ragi Cement Compan Draft) Financial Assessmer kpmg December 2003 4.4 Iraqi Accounting Standards Standards and International Accounting 4.4.1 Differences between Iraqi Accounting Standards A summary of the main differences affecting the financial statements of ICC is summarized below. • Although it is allowed to set-up provisions for non-recoverable assets, no provisions were made by ICC in connection with doubtful debts, slow moving inventory, and cash-in-transit and uncollected checks outstanding for a long period. • Fixed assets fully depreciated but still in use continue to be depreciated until there are retired. The excess depreciation is included in reserves.- • Certain expenses are charged directly to reserves (e.g. social reserves) instead of profit and loss account. • Accounting for grants received which become repayable when certain conditions are met. • No accounting principles for hyper inflationary economy. • Accounting for transactions denominated in foreign currencies. Various artificial exchange rates are used to purchase foreign goods, which distort the presentation of the balance sheet and the real profitability of the company. • Annual allocation of profits to certain institutions (e,g. R&D institution) is shown in reserves until cash call and payment made. These reserves should be reclassified as payable. • Accounting for litigation and claims are recorded only when paid. • Limited disclosure notes. 20 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 5 Analysis of summary combined balance sheets 5.1 Tangible fixed assets Composition 5.1.1 Set out below is an analysis of fixed assets as at 31 December 2002 with comparative figures for 2001: NBV Acquisition cost Acc. Dep. NBV (2002) (Expressed in thousands of iraqi Dinar) (2002) (2001) (2002) Land 84,694 N/A 84,694 Buildings (117,518) 1,261,895 N/A 1,144,377 (177,689) Machinery & equipment 13,526,787 12,749,088 Transportation equipment (152,418) 741,500 N/A 589,082 Small tools & molds 26,076 (4,074) N/A 22,002 Furniture & fixtures (82,310) 487,144 NIA 404,834 Other 12,052 12,052 NA (1,134,019) 16,140,148 15,006,130 2,602.276 Source: Prepared from ICC's 2002 & 2001 combined general ledgers. N/A: not available 5.1.1.1 Details • Land comprises land at the Head Office, the four production plants, and the quarries for raw materials. • Machinery and equipment comprises the plant and machinery located at the four production sites (Kirkuk, Kubaissa, Fallujah and Al-Qaim) and the Head Office. • The NBV increased during 2002 by approx. ID 14bn due to capital improvements made by ICC. ICC management indicated to us that fixed asset additions during 2002 were recorded at an exchange rate of approx. 2,000 ID / US $1. 5.1.1.2 Looted assets • In Baghdad, the Company has two warehouses, which were looted after the war. All the Company's stock in these warehouses was taken. ICC management informed us that one warehouse was completely "gutted" as all the doors, windows, and electrical connections were removed. • In addition, ICC management indicated that approx. 10 cars/trucks, a bulldozer in Kirkuk, office equipment (computers, air-conditioning) and various small parts/tools were also looted. _21 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be copied or distribued without KPMG's prior written consent. - --. - Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 5.1.1.3 Key limitations in fixed asset accounting • The fixed asset sub-ledgers per plant did not reconcile to the general ledger by approximately ID 12 bn; • Additions in 2002 after the computer system failure were not recorded; • Certain fixed asset balances were recorded directly in the general ledger; • The fixed asset sub-ledgers did not include total balances due to the system failure; * The fixed asset sub-ledgers sub-totals do not total accurately; and • The fixed asset sub-ledgers did not calculate depreciation for the 2002 additions. ICC management recorded depreciation directly in the general ledger. differences were not available. 5.1.2 Fixed asset count/ We performed a physical count of fixed assets at the production plants in Kirkuk and Fallujah and at the Head Office in Baghdad. As the company was unable to provide us with fixed assets sub-ledgers which reconcile to the general ledger, we were unable to trace the assets back to the books. However based on our discussions with the plant managers and our observations, plant, machinery and equipment located at both factories were not looted. Furthermore, although the Kirkuk factory was in a much better shape than the Fallujah factory, both would appear to be operational. Plant, nachinery and equipment at the head Office includes a production facility retired more than 2( years ago and a number of office buildings and warehouses which require major overhaul 22 This document is private and confidential and is to be read and used only in the context of the current status of the lragi Cement Compan. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 5.1.3 Production plants 5.1.3.1 Analysis of fixed assets by plant Set out below is an analysis of fixed assets by plant as at 31 December 2002: Acquisition cost NBV Acc. Dep. (Expressed in thousands of Iraqi Dinar) Kirkuk plant 3,567,054 (209,366) 3,357.687 Kubaissa plant 4,878,383 (315,516) 4,562.866 Al-Qaim plant 4,921,892 4,663.437 (258,454) Fallujah plant (77,765) 922,580 1,000,346. 1 Head Office (272,915) 1,772,473 1,499,557 A 16,140.148 (1,134,018) 15,006,130 Source: prepared from information abramed tom the general ledgers by plant. As noted in section! 5.1.1.3, the printed fixed assets sub-ledgers by plant did not reconcile to the general ledger by approx: ID 12 bn' due to the computer system failure in mid-2002. 5.1.3.2 Acquisition cost Set out below is an analysis of the historical acquisition cost of the Company's plants: Cost per plant (Expressed in million of US dollars) Kirkuk plant - built in 1984 by a Japanese company 200 Kubaissa plant - built in 1984 by a Japanese company 200 Al-Qaim plant - built in the 1980's by a Romanian company 150 Fallujah plant - built in 1970's by a German company 150 700 Source: ICC management. We were unable to reconcile the above amounts provided by ICC management to original contracts as ICC management could not provide us with the relevant contracts. Reportedly, construction of a state-of-the-art facility, with a capacity of 2 million tons per year, would cost over $300 million. The historical acquisition cost for fixed assets purchased in foreign currencies has been calculated based on a wide range of exchange rates over the last 20 years. It should be noted that no official exchange rates have been published by the country since the Gulf War in 1991. A fixed exchange rate of 1 ID for USD 3.2 was used for a long period. This rate allowed Iraqi companies to purchase assets and spare parts at low costs, which however understated the historical cost of the assets when converted into Iraqi Dinars and overstated the annual profits as the depreciation charge is very low. 23 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be conied or distributed without KPMG's brior written consent. Iraqi Cement Company kpmg (Drat) Financial Assessment December 2003 The net book value of the fixed assets as at 31 December 2002 at the current exchange rate of 2000 Dinars for 1 US is USD 7,5 million and is significantly lower than the acquisition cost of over USD 700 million as reported by ICC management. 5.1.3.3 Design capacity The design annual capacity for the four plants is as follows: • Kirkuk: 2 lines with a total capacity of 2 million tons of Portland cement. • Kubaissa: 2 lines with a total capacity of 2 million tons of Portland cement. • Fallujah: 3 lines with a total capacity of 280,000 tons of white cement. - Al-Qaim: 1 line with a total capacity of 500,000 tons of water resistant cement. The Kirkuk and Kubaissa plants were built by a Japanese company and are similar in layout and designed capacity. ICC management indicated to us that the Al-Qaim plant experienced production problems during the 1980s and final testing was never completed as the Romanian company responsible for building the plant left Iraq prior to the 1991 Gulf War. ICC management indicated that the Falujah plant has experienced quality problems as the white cement (main product) was not compliant with international standards. 5.1.4 Depreciation rates The single accepted method of depreciation in Iraq is on a straight-line basis. A summary of depreciation rates per major fixed asset category is set out below: Rate Fixed asset category Land Not depreciated Quarries Not depreciated 3 to 5% Buildings 5% Machinery and equipment 5% Transportation equipment (e.g. bulldozers) 10 to 12% Vehicles Furniture & Fixtures 15% 20% Computers and printers Source: ICC management. These rates are not in accordance with the Iraqi Accounting Standards. These rates have been promulgated by the Ministry of Finance for the Cement industry in Iraq as the assets in the cement industry are considered to have a longer life than that prescribed by Iraqi Accounting Standards. According to Iraqi Accounting Standards, assets still in use after being fully depreciated must continue to be depreciated at 50% of the previous rate until the asset is retired. The amount of additional depreciation expense for 2002 for fully depreciated assets is recorded as a reserve in equity amounting to ID 806 mn. 24 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 5.1.5 Impairment provision ICC management have not performed an impairment analysis on the four production plants. We visited the Kirkuk, Fallujah and Head Office facilities during our procedures. We did not visit the Al-Qaim and Kubaissa plants due to severe security risks. Based on our discussions with plant personnel of those facilities we visited, we have not identified any significant impaired assets except as noted below. • Production at the Head Office ceased more than 20 years ago and, according to ICC management, is fully depreciated. This facility has been cannibalized for parts for the other facilities. These parts were transferred at zero value. • The Fallujah plant has 3 lines built in the 1970's and 1 older line, which is currently not in use. The line not in use is according to ICC management fully depreciated. • ICC management indicated they want to improve the quality of the white cement and re-furbish the older line at Fallujah. The current capacity is sufficient for the Iraqi market of white cement. ICC management believe that increased quality and capacity will allow for export sales of white cement which has a higher value than standard Portland cement. • ICC management and plant personnel indicated that production in the plants visited could begin within a short period if sufficient electricity is supplied. While the plants need certain machinery and spare parts, the plants did operate during the period of U.N. sanctions. Machinery and spare parts were either obtained from Iraqi suppliers, produced by ICC or smuggled into the country. ICC management indicated that no significant capital expenditures were needed to produce at limited capacity, around 30% of the designed capacity. Should ICC be required to produce at full capacity then significant capital expenditures would be required as described in section 7. Other issues 5.1.6 • No significant non-core assets were identified based on the limited procedures performed. • All plants are at least 19 years old with depreciation periods of between 20 - 33 years. See section 5.1.4 for comments on the 2002 depreciation expense. • During our field visit, there was no production of cement at the plants due to a lack of electricity. • The Head Office holds equipment and inventory for the production of packaging for the cement. The equipment and inventory (700,000 bags) have not been used since the war. ICC management indicated that the equipment has been fully depreciated. However an adjustment for the impairment of any remaining book values in this regard has not been assessed or recorded by management. • No borrowing costs have been capitalized by management. ICC management stated that the loan received in 2002 of USD 2.3 million was used to purchase spare parts. 25 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. - - = Iraqi Cement Compan kpmg Drafi) Financial Assessmer December 2003 Assets under construction 5.2 Set out below is an analysis of assets under construction at 31 December 2002: 2002 (Expressed in thousands of Iragt Dinar) 3,575,682 Advance payments 506,928 Buildings Warehouses and silos 6,515 4,089,126 Source: prepared from the ICC 2002 combined general ledger. dvance payments consist of advances to suppliers made through the MIM. ICC manageme formed us that these outstanding advance payments were frozen at the beginning of the war. It not certain when or if these advances will be unfrozen. DRAN 26 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 Financial investments 5.3 Composition 5.3.1 An analysis of financial investments at 31 December 2002 is set out in the table below: 31 Dec 2002 % shareholding Date of acg. bear) (%) (ID _k) 2.66% Hadar Company - marble extraction 2002 20,000 Grok - marble extraction n/a n/a 20,000 40,000 Source: prepared from information obtained from ICC management. na - not available Detailed information on ICC's inyestment/ in Orok was not available to us. ICC management ndicated that the transaction was not finalized before the war started. The cheque used to pay for th ransaction was not cashed and was recorded as an outstanding cheque as at 31 December 2002 Given the current status of Iraq, it is uncertain whether any return will ever be recovered from these investments and therefore we propose that the carrying value of these investments be written down to zero (see adjustment l in section 2.4.6). 27 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Company. It is not to be copied or distributed without KPMG 's prior written consent. i kpmg December 200. 5.4 Inventory 5.4.1 Composition An analysis of inventory at 31 December 2002 is set out in the table below: 31 Dec 2002 (Expressed in thousands of Iraqi Dinar) 20,154,545 Spare parts 6,036,258 Finished goods and work-in-progress Letters of Credit (primarily for spare parts) 4,629,829 Raw materials 2,776,526 Consumables 2,181,657 Packaging 2,021,103 380,306 Oil and gas 38,180,224 Source: prepared from 1CC's 2002 general ledger Details 5.4.1.1 ICC management indicated to us that the outstanding Letters of Credit noted above of ID 4,629,829k made before the war have been frozen. The status and recoverability of these letters of credit is not clear and no provision has been recorded for this amount. Sales of inter-company raw materials and finished goods were recorded at "market value" and the closing inventory balance in each plant includes the gross margins earned on these transactions. We were unable to record an adjustment to eliminate this inter-company margin as insufficient information was available to us from ICC management. 5.4.1.2 "Looted" inventory Inventory looted, as noted per ICC management, included certain finished goods at the Baghdad warehouses, explosives (used in extraction at the quarries), and various small parts and tools. A provision for these amounts has not been recorded and no details as to the amount of inventory looted was available to us. 5.4.1.3 Key limitations in inventory accounting A sub-ledger, listing or aging of inventory was not provided to us by ICC management. 28 This document is private and confidential and is to be read and used only in the context of the current status of the Tragi Cement Company. It is not so be copied or distribuded without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 5.4.2 Stock count The inventory stock count performed by ICC personnel for the year 2002 noted no stock differences at any plants or warehouses. We indicated that to have no stock differences during a stock-count of a large entity with many different types of stock items (e.g. spare parts, finished goods, raw materials etc.) was unusual. ICC responded that differences in stock take results were often deducted from employee salaries. During our visit to the Kirkuk and Fallujah plants we noted that the spare parts warehouses were well organized and clean. In addition, ICC management indicated to us that a large number of spare parts had been smuggled into the country during the period of U.N. sanctions in the 1990's. 5.4.3 Valuation of inventory As regards the valuation of the inventory balances recorded at 31 December 2002, we have noted the following key issues: • The cost of raw materials varies due to transportation costs (depending on the location of the quarries) and suppliers. • In Kirkuk, the local government sold raw materials to ICC at a very low cost while the Fallujah and Kubaissa plants purchased raw materials at market rates. The Al-Qaim plant extracted much of its own raw materials. • The cost of spare parts varied due to exchange rates used, transportation costs and suppliers. Spare parts imported over the past years included a significant commission for having been "smuggled" into the country. These facilities have not been utilized since the start of the war. The quality and condition of the 700,000 bags held by ICC (purchase price is approx. USD 0,15 per bag) at the Head Office is in doubt as it has not been used for several months and may indeed never be used. ICC management indicated that these bags could be sold to the Northern or Southern cement companies. No provision has been recorded for these items in the accounting records. We have proposed that these items be written off (see adjustment 2 in section 2.4.6). 5.4.4 Inventory provision An inventory provision of ID 1,293,814k has been recorded in the ICC general ledger as at 31 December 2002 and local financial statements as a credit balance in receivables (see 5.5.1 below). his provision was recorded as a result of stock take differences noted in the 1999 physica nventory count. The related inventory has been reclassified to a suspense account in receivables le understand that this provision was only approved in 2002 and, as a result, the provision wa corded as a "prior year expense" in 2002 29 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. - Iragi Cement Company (Draft) Financial Assessment Kpmg December 2003 Trade receivables 5.5 Composition 5.5.1 Set out below is an analysis of accounts receivable at 31 December 2002: 31 Dec 2002 (Expressed in thousands of Iraqi Dinar) Suspense account (stock take difference) 1,290,075 886,385 Receivables Inter-divisional receivables 177,762 19,072 Loans to employees and other (1,293,814) Inventory provision 1,079,480 Source: prepared from the ICC 2002 general ledge 5.5.1.1 Details • Sales at ICC were primarily made by cash advance payments except for entities closely related to Saddam Hussain. As such, trade accounts receivable are limited. • ICC management indicated to us that the majority of the receivables noted above did not represent amounts owed to ICC but cash advances made to suppliers and unmatched cash disbursements. ICC management stated that the accounts receivable sub-ledgers may include amounts that have not been reconciled for as long as 20-30 years. • A re-classification of ID 58 bn in assets and liabilities was recorded by the Supreme Board of Auditors in the final 2002 financial statements. We have not received any detailed analysis of this adjustment from ICC but we understand that in accordance with local Accounting Standards all debit amounts in payables are re-classified to receivables and all credit amounts in receivables are re-classified to payables. This adjustment is not reflected above or in the summary balance sheets presented in section 4.3 of this report. Accounts receivable include inter-division transactions with a net amount of ID 177,762k, which have not been eliminated. • ICC management informed us that none of the receivables due are denominated in foreign currencies. • The Ministry of Finance has issued an order to delay all pre-war accounts receivable. The recoverability of these receivables is therefore unknown. • For details as to the "suspense account" caption and the "inventory provision" caption noted above, see section 5.4.4 for details. -_ 30 This document is private and confidential and is to be read and used only in the context of the current status of the Irag! Cement Comparv. It is not to be copied or distribued without KPMG's prior written consent. Iraqi Cement Company kpmg (Drafi) Financial Assessment December 2003 5.5.1.2 Limitations in receivable information provided The following limitations were imposed on us by ICC management as regards our examination of ICC's 2002 receivables: * The accounts receivable sub-ledgers for 2002 provided to us at the beginning of our work did not reconcile to the general ledger. We further noted that the sub-ledgers were not the final versions; • Final copies of all sub-ledgers were provided to the Supreme Board of Auditors but we were initially denied access to these documents; • We requested the final sub-ledgers but the printer at the Head Office was broken and therefore they could not be provided to us at that time; • On the last day of our procedures, we received the final accounts receivable sub-ledgers as these sub-ledgers were printed externally. We understand that the sub-ledger totals agreed to the general ledger but we were unable to perform additional procedures on these ledgers due to the time constraints; and • In addition, we have not been able to access the provision required if any, for all cash advances made to suppliers for fixed assets or inventory. 5.5.2 Provision for doubtful debts • In 2002 ICC operated primarily through cash advances for sales and as a result, only small doubtful debt provisions were recorded in 2002 (ID 10k). • Certain entities related to Saddam Hussain received credit for sales. A list of these receivables as at 31 December 2002 was provided to us and amounted to ID 445mn. No provision has been recorded for these items and we would propose that such an adjustment be made (see adjustment 3 in section 2.4.6). 31 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 Cash 5.6 Composition 5.6.1 An analysis of the cash and bank balance is set out in the table below: 31 Dec 2002 19 Nov 2003 (Expressed in thousands of Iraqi Dinar) Not available Cash in bank - ID (pre-war accounts) 7,999,891 Deposit in transit (USD1,5 mn) 3,000,000 Cash in bank - USD at the official bank rate - 368,847 Cash in bank - ID (post-war accounts) 192,051 3,560,890 7,999,891 Source: prepared from ICC's combined 2002 general ledger and information obtained from ICC management for 2003. 5.6.1.1 Details • ICC management informed us that all pre-war cash balances were frozen. It is not certain whether these amounts will be received. • The use of certified cheques in Iraq was common before the war to pay for goods. The status of outstanding cheques and deposits in transit made before the war is not clear at this time. The amount is not material. • Cash in bank as at 19 Nov 2003 represents cash in bank accounts opened during November 2003. From August 2003 until November 2003, most sales were made in cash. • Cash in Bank - USD at 19 Nov 2003 was translated into ID for accounting purposes at the official bank rate (ID 1 / USD 3.22) and not the current market rate (ID 2,000 / USD 1). ICC nanagement indicated that the cash would not be converted into ID but used for US dolla expenses. The US dollar balance at 19 Nov 2003 was USD 1,189,831. The ID equivalent woul be ID 2,379,662K and not ID 368,847k. This adjustment should only affect the 2003 accounting records. • The deposit in transit at 19 November 2003 includes a cheque that has not yet been deposited for USD 1.5mn. The cheque is kept at the Head Office and we understand that there is doubt whether this cheque can be redeemed. ICC management indicated to us that in August 2003 the bank did not accept the cheque. ICC management are currently following up on this issue. No provision for this amount has been recorded in the accounting records. We have proposed an adjustment to write-off this cheque (see adjustment 4 in section 2.4.6). 32 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's brior written consent. L Iraqi Cement Company kpmg (Drafi) Financial Assessment December 2003 "Looted" cash 5.6.1.2 Cash provided by the CPA for ICC salaries was stolen from a safe in the Head Office and a safe in Kirkuk amounting to USD 209,000 and ID 119mn respectively. ICC management were unable to provide us with any evidence confirming the amounts stolen in Kirkuk. We have not proposed any adjustment as it is unclear whether the cash provided by the CPA, which has been looted, belongs to the company. Existence of cash 5.6.2 We have obtained a copy of the bank statements and bank reconciliations at 31 December 2002 and at 19 November 2003. DRAFI 33 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comoany. It is not to be copied or distributed without KPMG's prior written consent. Kpmg Dro Premiere commen ecember 200. Trade accounts payable 5.7 Composition 5.7.1 An analysis of trade accounts payable as at 31 December 2002 is set out in the table below: 31 Dec 2002 (Expressed in thousands of Iragi Dinar) Trade accounts payable 9,111,943 Payable to the Ministry of Finance 7,049,532 Inter-division payables 474,077 16,635,552 Source: prepared from the combined ICC general ledger for 2002, 5.7.1.1 • Purchases at ICC are primarily made by cash advance payments. As such, trade accounts payable are limited. • ICC management indicated to us that the majority of the payables did not represent amounts owed by ICC but cash advances received from ICC customers and unmatched cash advances received from ICC customers with sales invoices. ICC management stated that the accounts payable sub-ledgers may include amounts that have not been reconciled for as long as 20-30 years. • Accounts payable includes inter-division balances with a net credit balance of ID 474 million which have not been eliminated. • Trade accounts payable are primarily denominated in Iraqi Dinar per ICC management for local suppliers and foreign currencies for imported fixed assets and spare parts. ICC management provided a list of accounts payable and purchase commitments in foreign currencies as at 21 September 2003 as requested by MIM. The total of the list was ID 1.5bn (using 2,000 ID / 1 USD) consisting of payables in US dollar, Euro, British pounds, and Japanese Yen. • The Ministry of Finance has issued an order to delay all pre-war accounts payable. The obligation of ICC to therefore settle its pre-war liabilities is therefore unknown. 34 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Comparry. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 5.7.1.2 Limitations in payable information provided The following limitations were imposed on us by ICC management as regards our examination of ICC's 2002 payables: The acous a she sub ledgers for per ide to us althe begining fee work did not * Final lodies od al subledges eum provided to the Supreme Board of Auditors but we were We requested the final sub-ledgers but the printer at the Head Office was broken and therefor hey could not be provided to us at that time On the last day of our procedures, we réceived the final accounts payable sub-ledgers as thes ub-ledgers were printed exterhally. We, understand that the sub-ledger totals agreed to th general ledger but we were unable to perform additional procedures on these ledgers due to the time constraints; and • In addition, we have not been able to access the provision required if any, for all cash advances made to suppliers for fixed assets or inventory. 5.7.2 Completeness of trade payables CC management indicated that purchase commitments in foreign currencies totaling Euro 1711 approximately ID 380mn) as at 21 September 2003 per the list submitted to MIM. A list o purchase commitments for Iraqi suppliers was not available as ICC management stated that local purchase commitments could be cancelled due to the war. 35 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 5.8 Dividends payable 5.8.1 Movements Set out below is an analysis of movements in dividends payable as at 31 December 2002: (Expressed in thousands of Iraqi Dinar) 13,512,111 Dividends payable at 31 December 2001 12,325,640 Allocation of 2002 income (see 5.10.2 below) (8,889,445) Payments made 16,948,206 Dividends payable at 31 December 2002 Source: prepared based on the combined 2002 general lodger of IC. DRA This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company Kpmg (Draft) Financial Assessment December 2003 5.9 Bank loans Composition 5.9.1 Set out below is an analysis of loans due as at 31 December 2002: 31 Dec 2002 (Expressed in thousands of Iragi Dinar) Bank loans 3,990,376 Source: prepared based on the combined 2002 general ledger of ICC. 5.9.1.1 Details ICC received two loans in 2002 from Al-Rafidain bank, denominated in US dollars. These have been converted into ID for accounting purposes using an exchange rate of ID 1,985 to 1 USD. The key teams of these loans is as follows: • Interest rate is 4% per annum with a term of two years. • The status of the loans as well as interest and any penalties for late payment is not certain at this time as all pre-war bank loan balances have been frozen. 5.9.2 Repayment schedule (2003 and beyond) Set out below is a summary repayment schedule for the above loan obligations as at 31 December 2002: 31 Dec Paid in Due in Original Due in Lender 2002 2003 Loan 2002 2004 (Expressed in thousands of US dollars) Al-Rafidain Bank 1,300 165 1,135 650 500 Al-Rafidain Bank 875 1,000 125 485 375 290 1,135 2,010 2,300 875 Source: Based on information obtained from ICC management and the respective loan agreements. • One principal and interest payment was made during 2002 for each loan. • A principle payment of USD 165,000 for the first loan was made in January 2003. • ICC management indicated that the loans were denominated in US dollars as the funds were used for purchasing spare parts from outside of Iraq. 37 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company (Draft) Financial Assessment kpmg December 2003 Capital and reserves 5.10 Composition 5.10.1 An analysis of ICC's capital and reserves as at 31 December 2002 is set out in the table below: 31 Dec 2002 (Expressed in thousands of Iragi Dinar) Share capital 1,523,000 Reserves: - General Reserves 16,432,267 - Sundry Reserves 5,587,820 5,277,715 - Capital reserves 27,297,716 Source: prepared from the combined ICC 2002 general ledger. Company in a re-organization more than lO years aços, ICC management informed us that one plant was transfered out of ICC during this re-organization. 5.10.2 Allocation of net income for the year 2002 Iraqi legislation set down certain specific rules and percentages for the allocation of the annual net income of Iraqi companies. However the proposed allocation of net income can be amended after discussions with the Authorities. In August 2002, we understand that such a change was approved by MIM. An analysis of the approved allocation of net income for the year 2002 is set out in the Allocation to: 31 Dec 2002 (Expressed in thousands of Iragi Dinar) Dividends payable for 2002 12,325,640 Capital reserves 3,010,790 General reserves 1,001,212 Sundry reserves: - Research & development 700,848 - Social reserves (pensions) 500,606 Net income 17,539,096 Source: prepared from the combined ICC 2002 general ledger. 38 This document is private and confidential and is to be read and used only in the context of the current status of the Irogi Cement Compan. It Is not 10 be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 5.10.3 Movement in equity reserves Set out below is an analysis of the movements in the Company's equity reserves in 2002: Allocation from Other Reserves 31 Dec 2001 movements 2002 income 31 Dec 2002 (Expressed in thousands of Iraqi Dinar) Sundry reserves 4,652,251 (265,885) 1,201,454 5,587,820 Capital reserves 1,460,942 3,010,790 805,895 5,277,627 General reserves 1,001,212 680,238 16,432,267 14,750,817 6,793,431 5,213.456 15,296.827 27,297,716 Source: prepared from the combined ICC 2002 general ledger. For details on the composition and movements in sundry reserves, see section 5.10.3.1 below. The capital reserves movement of ID 805,895k in 2002 relates to excess depreciation for fully depreciated assets. See section 5.1.4 on Fixed Assets for additional information. The general reserves movement of ID 14,750,817k relates to cash and assets granted by MIM to ICC for capital improvements /at the plants. ICC management indicated that the amount should be recorded in general reserves and not as a loan, although if net income improved as a result of an increased production capacity then the grant would have to be repaid. No adjustment has been recorded by ICC management in the accounting records for such an eventuality. We have proposed that the 2002 balance of ID 16,432,267k be shown as a liability until the exact nature and amount of any obligation is determined (see adjustment 5 in section 2.4.6). In addition, ICC management informed us that MIM had provided smaller grants to ICC in the years 2000 and 2001 which have been recorded as general reserves. No additional information or supporting documentation was available to us regarding these transactions. 5.10.3.1 Movement in sundry reserves Set out below is analysis of the movements in the Company's sundry reserves in 2002: Other Allocation from Reserves 31 Dec 2001 2002 income movements 31 Dec 2002 (Expressed in thousands of Iragi Dinar) Research & development 700,848 964,439 (168,982) 432,573 500,606 Social (pension) (97,215) 886,919 483,528 Other reserves - 312 3,736,150 3,736,462 1,201,454 (265,885) 5,587,820 4,652,251 Source: prepared from the combined ICC 2002 general ledger. 39 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Comparv. It is not to be copied or distributed without KPMG's orior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 The research & development reserve of ID 0.9 bn and the social reserve of ID 0.9 bn were created from the income of ICC in prior years. Before the war, these reserves were to be paid to governmental institutions. Post-war, it is uncertain whether these reserves will still be required to be paid to these institutions. In any cases, until this issue is resolved by the new Iraqi government, these reserves should be recorded as liabilities of the Company. We have proposed an adjustment to reclassify these reserves as liabilities (see adjustments 6&27 in section 2.4.6). 40 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 6 Commitments and contingent liabilities 6.1 Commitments As regards the Company's commitments as noted in our report in section 5, the following issues should be taken into consideration: • It is currently unclear whether pre-war sales commitments will be honored at current market rates (over USD 40-60 per ton) or contractual rates (+/- USD 10 per ton). However ICC management agree that they do have a commitment to deliver the quantity ordered. The head of legal department stated that there is currently a claim filed with the court by a customer of ICC to the effect that ICC will deliver the cement at the pre-war selling price i.e approximately USD 10 per ton instead of the current price of over USD 40-60 per ton. ICC management believe that ICC will win the court case on the basis that the change in the purchase price is as a result of exceptional circumstances. In these cases, ICC management is of the opinion that customers could either receive a refund of their cash advance payment or pay the current price per ton. • Pre-war purchase commitments are not clear at this time. A list was submitted to MIM in October 2003 but the amounts have not been approved as of the date of this report. Employee salaries are currently paid by the CPA. ICC expects to be able to start paying the aff salaries themselves during 2004. We are not aware whether the salaries paid by the CPA c behalf of ICC will require te be repaid to the CPA. 6.2 Contingent liabilities The following key contingent liabilities should be taken into consideration as regards ICC's financial position: • Penalties for past non-compliance with Iraqi Accounting legislation; • Repayment of the government grants received totaling more than ID 16bn; • Research and development reserves and social reserves may be transferred to the Government authorities; • Frozen cash accounts and outstanding cheques / deposits-in-transit may not be recoverable; • Frozen letters of credit may be not realised; • Frozen bank loans may or may not be required to be repaid; • Pre-war trade accounts receivables and payables may or may not be realised / required to be paid; • The existence of the Company's fixed assets, the completion of the Company's construction-in- progress and the realization of the Company's advance payments for fixed assets of nearly ID 4bn; • The realization of the Company's purchase commitments for spare parts and supplies from foreign companies; and 41 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 • Potential reclamation costs regarding the quarries. 6.3 Claims and litigation • ICC management indicated to us that they have had few claims or litigations in the past. Those claims that were made related to claims by ICC for bad cheques received from customers. • ICC management stated that litigation for product liability and guarantees were very difficult to pursue under pre-war Iraqi law. 42 This document is private and confidential and is to be read and used only in the context of the current status of the iraqi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 7 Capital Investments Before the war, ICC management completed a capital investment assessment and provided a list of required capital investments as set out below. We have not evaluated the validity or completeness of this assessment. No. Description Total Price Location 4 Packing machine 300,000 1,200,000 Kubaissa Packing machine Kirkuk 300,000 900,000 Packing machine (plus accessories) 600,000 Fallujah 600,000 Generator for electricity (including transportation and installation) Kubaissa/ Kirkuk/ Al-Qaim 6,000,000 18,000,000 Gear with 2 pinions for cement mill 3 500,000 Kirkuk 1,500,000 Gear with 1 pinions for cement mill 500,000 500,000 Fallujah Gear boxes 10 250,000 2,500,000 All plants Air cooler after kiln 1,000,000 All plants 4,000,000 Air quenching cooler exhaust fan 2 600,000 Kirkuk 1,200,000 Compressor Air 20 @ 10 cubic m pressure 7 bar 20 @64 cubic m pressure 2-bar 40 50,000 All plants 2,000,000 /3 High tension motor (raw mill) 500,000 1,500,000 Kubaissa/ Kirkuk/ Al-Qaim Shovel - crane 500,000 10 5,000,000 Kubaissa/ Kirkuk/ Al-Qaim Bulldozer 10 500,000 Kubaissa/ Kirkuk/ Al-Qaim 5,000,000 Dump truck 10 300,000 3,000,000 Kubaissa/ Kirkuk/ Al-Qaim Kiln shell @ 4.3 meter (70 mm) 2 1,000,000 Kubaissa and Kirkuk 2,000,000 Kiln shell @ 4.4 meter (80 mm) 1 1,000,000 Al-Qaim 1,000,000 Metallic conveyor (after clinker) 4 500,000 2,000,000 All plants 4 On line sampling & quality control system 1,000,000 250,000 All plants Upgrade PLC control system including software/hardware 4 500,000 All plants 2,000,000 5 Training 1,000,000 200,000 All plants + Head Office Environmental dust prevention system for 4 2,000,000 500,000 production process All plants Air conditioning & dust prevention for 4 2,000,000 500,000 All plants Computer equipment TOTAL USD 59,900,000 Source: prepared from information obtained from ICC management. 43 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Comparv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Compan Draft) Financial Assessmen kpmg December 2003 8 Sales Cycle Description and Cash Controls Under this engagement we have assessed certain matters involving ICC's internal controls and other operational matters. The comments and recommendations set out below are intended to assist in improving ICC's internal controls and increase ICC's operating efficiencies but are not al encompassing. These issues have been identified only as a result of the limited procedure: performed under this engagement and therefore other issues may exist which are not included below. Sales 8.1 Current status 8.1.1 • ICC's pre-war sales were co-coordinated by the Head Office. • ICC's post-war sales are co-coordinated by each Plant due to changes in Head Offic communication issues (limited access to phones), and security issues whe management, traveling from the Head Office to the plants. Pre-payments of goods is made by ICC's customers, usually by certified cheque, at a loc anch of one of two Baghdad ban! Customers must submit proper building permits / proof of construction and the amount ement needed for that construction in order purchase ICC cement product • In the majority of cases, the customers collect their cement at ICC's plant. ICC management informed us that selling prices are set every two weeks during a meetin etween MIM and the GDs of the three Iraqi cement companies (Northern, Southern an 8.1.2 Potential Control Weakness / Improvements • Plant managers control sales prices allowing for unauthorized discounts. No subsequent controls are in place to control the sales prices invoiced. • Matching between the sales agreement to the actual sales price / cash received/ quantities doe lot occur. Significant discrepancies identified are not followed up on a timely basi. A greater segregation of duties is required between ICC staff responsible for the loading dock nd for the weighing station. The controls over this process should be examined by IC management and clearly documented. _44 This document is private and confidential and is to be read and used only in the context of the current status of the iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. L Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 8.2 Petty Cash 8.2.1 Current status • Each plant as well as 3 Head Office departments holds ID 150,000 of petty cash for small purchases such as office supplies. • Petty cash reconciliations are performed monthly. • Signed receipts from the cashier are required for each cash disbursement and are reviewed by another accountant. 8.2.2 Potential Control Weakness / Improvements • Greater physical access controls to the petty cash should be implemented. There have already been instances where petty cash as has been stolen. • Adequate descriptions over the use of petty cash should be maintained as there may be a lack of proper receipts / supporting documentation for many types of expenses in Iraq (taxi, office supplies purchased at small shops etc.). • Authorisation limits and budgets should be set and monitored for petty cash disbursements. • Reconciliations between physical cash and the petty cash records should be made on a timely basis with any differences followed up immediately. • ICC management should monitor and approve the petty cash statements and reconciliations. 8.3 Salaries 8.3.1 Current Status • The CPA currently pays the salaries of ICC's staff. • Each employee should physically receive their own salary (no delegation should be allowed) and sign a cash receipt confirming their receipt. Management should monitor the cash disbursements and the signatures on cash receipts. • Cash not disbursed is returned to the ICC bank account until the next month. 45 This document is private and confidential and is to be read and used only in the context of the current status of the tragi Cement Comparv. It is not to be copied or distributed without KPMG's brior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessmen December 2003 8.3.2 Potential Control Weaknesses / Improvements • 'Ghost' employees exist on ICC's list of employees. • Salaries are provided to the wrong employees. • Incorrect salary rates are paid. Terminated employees are not recorded on the employee listing on a timely basis. • 'Commissions' are charged on salary disbursement to employees by the cash disbursement employee. • ICC management should monitor and approve the petty cash statements and reconciliations, and documented through a signature and date. 8.4 Current Status 8.4.1 • A list is prepared of all/cheques received. These cheques are then deposited with the bank. 8.4.2 Potential Control Weaknesses / Improvements • The cheques should be endorsed immediately upon receipt. A sub-ledger should be maintained and copies of cheques received but deposited at the banks should be made. • Cheque deposit slips should be reconciled to the cheques received sub-ledger by a person other than the person that originally prepared the sub-ledger. • Physical access to cheques received should be limited. • A formal written corporate policy for cash receipts should be drawn up and implemented. • ICC management should monitor and approve the cheque received ledgers and deposits received by the bank. This process should be evidenced by a signature and date. 46 This document is private and confidential and is to be read and used only in the context of the current status of the Iragi Cement Compan. It Is not to be copied or distributed without KPMG's prior written consert. Iraqi Cement Company kpmg (Draft) Financial Assessmen December 200. 8.5 Cheques - Issued 8.5.1 Current Status the cheque with supporting documentation and authorized • An ICC employee prepares signatures. • MIM approves certain cash disbursements. • Current bank balances are examined to ensure sufficient funds are available. 8.5.2 Potential Control Weaknesses / Improvements • Enticement fees to facilitate transactions may occur. • A formal, written policy on the appropriate authorizations and limits should be prepared for the Head Office and the plants. • ICC management should monitor, and approve the cheques made ledgers and bank payments made. This process should be evidenced by a signature and date. 8.6 Bank Accounts 8.6.1 Current Status • Pre-war bank accounts and outstanding cheques are currently frozen. • Two accounts opened during November 2003 at the Rasheed Bank - an ID account and a US dollar account - in Baghdad. Bank branches near the plants have been opened for the receipt and disbursement of cash. • The US dollar account has an official exchange rate of ID 1 / US $3.22. 8.6.2 Potential Control Weaknesses / Improvements • Bank reconciliations should be prepared monthly and reviewed on a timely basis. Outstandin! heques should be followed-up and documented also on a timely basis. During our field visit we noted that the bank reconciliations as at 31 December 2002 included outstanding cheques for several periods. Cash management procedures need to be improved and re-organised. The Company's ability to monitor its overall cash position may be difficult due to the changing disbursements and receipts at each plant and the Head Office. 47 This document is private and confidential and is to be read and used only in the context of the current status of the iragi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 • The Us dollar account should be strictly used for US dollar expenses and not converted into II niess conversion is made at market rates which is currently at ID 2,000 / US 51 ICC management should be monitor and approve the bank statements, reconciliations, and cheque listings. This approval process should be documented through signatures and dates. • An appropriate segregation of duties is critical to the safeguarding of assets and the overall control environment at ICC. DRAFT 48 This document is private and confidential and is to be read and used only in the context of the current stars of the Iragi Cement Company. It is not to be copied or distributed without KPMG's prior written consent. Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 9 Management Letter Comments they have how if a dy been of the in this repo leter comments of ICE's auditors to the extent that ICe management indicated that Cash in Bank - USD should only be translated into ID at th fficial rate of ID 1 / USD 3.23 and not the current market rate of ID 2,000 / USD1. W strongly encourage management to ensure that their US dollars are not translated at this official rate. We understand that converting ID 1 into USD 3.22 is not possible at the bank. • The Company's current IT systems are not functioning properly as regards the old mainframe system and the new PC-based system. After the system is upgraded, further training and computers will be needed. In addition, IT security issues will be need to be considered when implementing the system such as: - System upgrades and maintenance responsibilities (ICC or MIM); - Passwords and appropriate access to enter data or programming changes; - System back-up and storage; and Ter inion ion if tocounting information interde system (for example, accounting * Due to lotings we an entrol proper em at die perform prope feed set counts and • The accounting system and printer were not functioning properly during our audit and not all final ledgers were available to us. Certain accounting adjustments were not recorded in the 2002 financial statements by the accounting department as a result (for example, the elimination of inter-division transactions). 49 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. Iraqi Cement Company kpmg (Draft) Financial Assessment December 2003 10 Management Assessment Introduction 10.1 Set out below is a preliminary assessment of management of ICC based on the limited procedures performed under this engagement and our limited exposure to ICC management. These comments are for your information purposes only and for a more detailed assessment of ICC management a full scope investigation should be performed. 10.2 Management - General issues • We understand that the DG of ICC is heavily inyolved in the day-to-day operations of the plants and appears to be quickly gaining control of the organization. The DG was directly involved in co-coordinating our procedures at the plants and the Head Office. The previous government was a planned economy which was focused on production. As such, staff and management of state-owned entities were not as concerned with the quality of financial information and supporting documentation as is the case in wester market economies. Furthermore, management were not motivated by the Company's financial results but rather the Company's production. Certain salaries / bonuses were linked to production outputs. 10.3 IT management • The IT systems were previously provided by MIM. The current systems (software and hardware) are not functioning properly. A clear IT strategy should be implemented to improve the quality of financial information and non-financial information and ensure the effective operation of the Company's IT framework. 10.4 Accounting Department • Financial information for the year ended 31 December 2002 had still not been finalized during certain financial statement balances and transactions. • Accounting and financial errors made by accounting staff were deducted from employee salaries. For example, if there were differences between the accounting records and the physical inventory count at a plant than the difference could be taken from the relevant person's salary. As a result, during the 2002 inventory count, there were no differences identified at any plants or 50 This document is private and confidential and is to be read and used only in the context of the current status of the Iraqi Cement Comparv. It is not to be copied or distributed withour KPMG's prior written consent. --. = Iragi Cement Company kpmg (Draft) Financial Assessment December 2003 the Baghdad warehouses between the physical amounts stored there and the Company's accounting records. 10.5 Production Engineers • During our plant visits, we met with several managers and engineers. We were however unable to assess the quality of these employees due to the technical nature of their work which is beyond the scope of our engagement. While in Baghdad, we worked with the chief engineer of ICC, Nagib Teleb. He was very a perative in providing information for the projections, accompanied us on our plant visit t Kirkuk and displayed an excellent understanding of the cement industry. DRAFT 51 This document is private and confidential and is to be read and used only in the context of the current status of the iraqi Cement Companv. It is not to be copied or distributed without KPMG's prior written consent. i (b)(6) Private Sector Development Group Coalition Provisional Authorit 3aghdad, Iraq 12 October 2003 Dear (b)(6) Compilation of a balance sheet as at 31 August 2003 and preparation of prospective financial information for the period from 1 September 2003 to 31 December 2004. In reference to your letter dated 16 September 2003, our proposal dated 23 September 2003 and our subsequent meeting on 4 October 2003, the purpose of this letter is to confirm our understanding of the terms of our appointment and the nature of the services we will perform for you. The scope is as follows: • To compile a balance sheet of Iraqi Cement Company ("the Company" or "ICC") as at 31 August 2003; • To assist ICC in the preparation of Prospective Financial Information ("PFI") for the 16 month period ending 31 December 2004; • To review the internal cash control policies in place and prepare a short report on the weaknesses identified; • To conduct a physical inventory count of the inventory and property, plant and equipment and prepare a short report on the conditions of those assets; and • To perform an overall assessment of the management's understanding of the company's ability to respond to current dynamics and its ability to respond to, identify and control its cost drivers and prepare a short report of our assessment. Our deliverables will be submitted in English and Arabic. Professional standards We conduct our engagements in accordance with the principles of independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour and technical standards as defined in the technical pronouncements of the International Federation of Accountants. Scope of compilation We will compile the balance sheet of the Company in accordance with the International Standards on Auditing applicable to compilation engagements on the basis of information provided by you. We will not carry out audit or review engagement procedures or otherwise attempt to verify the accuracy or completeness of such information. Our report on the balance sheet of the Company is presently expected to read as follows: 'On the basis of information provided by the management we have compiled, in accordance with the International Standard on Auditing applicable to compilation engagements, the balance sheet of ICC as at 31 August 2003. Management are responsible for the information reflected in the balance sheet. We have not audited or reviewed the balance sheet and accordingly express no assurance thereon.' Scope of the assistance in preparation of the Prospective Financial Information (PF), We would assist ICC in preparation of the PFI, which would basically involve construction of a financial model. The financial model would be prepared in discussions with the management of the Company and would basically involve preparation of revenue and cost models, based on which projected income statements, balance sheets and cash flows statements would be prepared for the period of 16 months ending 31 December 2003. We would like to highlight that the role of KPMG would be limited to the preparation of the financial model based on the discussion carried out with senior management team. KPMG's assistance in development of the financial model shall not be construed as expression of its opinion with respect to the reasonableness and achievability of the same. Responsibility of management You, as management, are responsible for both the accuracy and completeness of the information supplied to us and responsible to users for the financial information compiled by us. includes the maintenance of adequate accounting records and internal controls and the selection and application of appropriate accounting policies. Our engagement cannot be relied upon to disclose whether fraud or errors, or illegal acts exist. However, we will inform you of any such matters which come to our attention. We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information we request in connection with our compilation. Before starting the compilation of your balance sheet we shall require your accountant to prepare a tallied trial balance and certain schedules, listings and analyses, the form and contents of which we shall explain to him as well as giving him draft format. •-•+ Timing Provided no unforeseen major problems are encountered especially with the security in Baghdad, any of the visits after consulting with the contracting parties without penalties to KPMG. Fees Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement. Individual hourly rates vary according to the degree of responsibility involved and the experience and skills required. Our invoices are due and payable on receipt. We expect our total fees to be USD S5,000 plus outlays and any taxes applicable to Iraq, payable as follows: • 50% on commencement of the work; and • Balance 50% on delivery of the draft deliverables. Should there be any delays in the provision of information by the Company, should other issues arise which require additional work to be performed by KPMG or should delays arise from any other cause outside our control, we shall discuss such matters with the Company and shall have the right to defer completion of the work and the Engagement letter until the matters are resolved. In the event of delays and/or additional work being required of KPMG arising from these reasons, we have the right to request additional fees needed to complete the Engagement letter based on the additional time spent and hourly rates of particular employees. Applicable law This engagement shall be governed by, and construed in accordance with the Bahrain relevant laws. The Courts of Bahrain shall have exclusive jurisdiction in relation to any claim, dispute or wires an itemingy have to ject a an ation being brought in i. e Cowary rain abay the action has been brought in an inconvenient forum, or to claim that those Courts do not have jurisdiction. Administration Responsibility for this engagement will be carried out by suitably qualified staff. We aim to provide you with the best possible service and Abdul Hakim Al-Adhamy, as engagement partner, will seek to ensure that this is satisfactory at all times. If however, at any time you are unable to deal with any difficulty through him please let us know by contacting our managing partner (b)(6) Confidentiality We are well aware of the importance that you place on confidentiality requirements and we have a proven record of maintaining a strict code of confidentiality. Our policy requires that affairs of clients be confidentially kept at all times and the only exceptions are when the following conditions are met: • The client has authorised disclosure in writing; • There is a professional duty to disclose; • Disclosure is required by a legal or judicial process; and • Disclosure is required by law. If the arrangements outlined are in accordance with your requirements and if the above terms are acceptable to you, please sign the duplicate of this letter in the space provided and return it to us. We appreciate the opportunity to be of service to you and we emphasise our commitment to provide you with quality services in an efficient and timely manner. Yours faithfully b) (6) Partner Icknowledgement on behalf o raqi Cement Compan Date ((b)(6) Iraqi Cement Company Appendix 2.1 Balance Sheet at 31 December 2002 (unaudited) Per production plant (in Iraqi Dinar) Combined Head office Kubaissa Kirkuk Fallujah Al-Qaim Total assets 66,394,850,123 20,361,771,547 16,290,419,020 11,140,165,652 8,419,855,877 10,182,641,239 Tangible fixed assets 15,006, 129,646 1,499,557,341 4,562,866,134 3,357,687,391 922,580,935 4,663,437,845 Assets under construction 4,089,126,084 0 0 4,035,658,884 53,467,200 Financial investments 40,000,000 40,000,000 0 0 0 Inventory 38,180,223,668 6,307,936,697 11,163,477,773 8,018,649,320 7,262,385,111 5,427,774,767 Receivables 1,079,479,576 360,317,373 767,422,798 213,776,505 (251,011,111) Cash (11,025,989) 14,839,249 7,711,195,024 7,999,890,346 203,756,937 21,112,523 48,986,613 Total liabilities 66,394,850,123 39,925,049,125 3,504,526,888 9,441,346,531 5,219,123,260 Capital 8,304,804,319 0 1,376,758,296 1,522,999,997 83,382,969 0 62,858,732 Reserves 27,297,715,952 10,525,592,979 3,581,252,366 6,944,861,796 5,016,284,491 1,229,724,320 Bank loans 3,990,376,215 3,990,376,215 0 Payables 16,635,552,072 7,084,040,748 (160,033,447) 3,225.661,09% 3,989,398,940 Dividends payable 16,948,205,887 16,948,280,887 2,496,484,735 (75,000) - Iraqi Cement Company Appendix 2.2 Profit and Loss Account for the year ended 31 December 2002 (unaudited) Per production plant Al-Qaim Fallujah Kirkuk Head office (in fragi Dinar) Combined Kubaissa Revenues 8,262,431,564 7,740,049,702 48,506,844,584 4,054,470,995 13,869,747,773 14,580,144,550 Revenue from production 8,245,615,660 13,729,114,697 7,644,051,899 14,559,004,934 3,322,914,71S 47,500,701,905 140,633,076 95,997,803 Other revenues 21,139,616 16,815,904 731,556,280 1,006,142,679 4,804,823,661 30,967,748,257 6,944,506,567 6,384,595,431 Expenses 7,020,676,079 5,813,146,519 1,066,959,044 Salaries and wages 1,041,591,412 2,038,784,828 1,360,794,395 6,477,557,354 969,427,675 993,736,480 2,053,309,843 1,324,154,372 Raw material: 7,737,047,670 3,340,218,219 445,663,619 548,738,108 Limestone 608,175,064 3,815,483,843 2,212,907.052 324,368,207 Clay 23632738 89,160,060 839,375,142 425,846,875 0 0 Silica Sand - Fallujah only 3,500) 249,946,326 249,949,826 0 372,366,183 169,682,185 953,898,337 tron ore 1,495,946,705 24,745,475 165,370,190 110,134,015 18,600,446 Gypsum 641,039,449 Flint - Fallujah only 11,39.234) 267,888,042 (79,139,832) 829,787,659 37,289,220 11,638,047 74,556,081 25,628,756 Alcohol and reagents 52,166,845 214,411,379 Explosives 266,578,224 366,877,603 431,656,889 1,196,035,793 29,668,486 186,795,097 Oil and gas 181,037,718 1,375,432,076 1,615,070,153 3,215,105,947 1,309,555,273 533.465,989 Spare parts and maintenance 8,048,629.438 672,785,047 6,241,772,167 Packaging material 2,676,693,916 262,535,903 1,850,951,422 Packaging materials purchase 27,243,529 5,287,867,695 1,840,186,907 672,785,047 1,968.846,333 0 Packaging materials produced 953,904,472 10,764,515 235,292,374 707,847,583 4,279,829 253,825,657 387,526,055 60,387,163 Water and electricity 1,084,939,698 378,920,994 External services 155,915,614 2,407,485,611 159,680,160 458,098,465 3,424,072,419 242.892,569 Interest 311,747,002 348,750,698 3,800,000 10,914,696 22.289,000 803,908,702 249,882,791 249,033,502 187,200,931 29,732,873 88,058,605 Depreciation 94,204,421 302,500,349 40,197,772 1,132,209,678 Other expenses 39,429,182 1,608,541,402 (3,376,282,750) (6,003,507,084) (1,559,304,400) Capitalised costs for self-construction (1,064,317,075) (3,602,859) 2,935,226,041 Profit (loss) for the year 1,877,836,133 17,539,096,327 7,635,637,983 (1,758,675,524) 6,849,071,694 Iraqi Cement Company Appendix 3.1 Projected Profit and Loss Account for the year ending 31 December 2004 With Comparative Figures for the year 2002 All amounts in Iragi Dinar (ID) unless otherwise stated 2004 Projections 2002 Actual Head Office Kirkuk Kubaissa Fallujah Combined Combined Al-Qaim Total revenues 45,050,000,000 • Acct no. 37,550,000,000 11,550,000,000 34,050,000,000 128,700,000,000 500,000,000 48,506,844,584 Revenues from current year production 411,412 45,000,000,000 37,500,000,000 11,500,000,000 128,000,000,000 34,000,000,000 45,513,723,388 Change in finished goods (126,568,744) Change in semi-finished goods 2,113,547,261 Other revenues 500,000,000 50,000,000 50,000,000 50,000,000 50,000,000 700,000,000 1,006,J42,679 Total costs 26,801,800,056 30,907,214,119 5,560,058,605 7,556,148,042 94,740,631,126 23,915,410,303 Salaries 30,967,48,266 31,326 3,456,000,000 2,472,000,000 2,284,800,000 3,456,000,000 14,404,800,000 2,736,000,000 6,477,557,354 Other costs (estimated) 3,000,000,000 0 3,000,000,000 Raw materials 321 3,807,999,680 3,074,638,080 1,016,760,000 4,877,368,576 Limestone 7,737,047,674 12,776,766,336 3211 2,283,227,520 1,55S,706,880 362,419,20 1,770,725,376 5,972,078,976 3,815,483,844 Clay 3212 157,772,160 464,284,800 992,540,160 370,483,200 839,375,142 Silica Sand - Fallujah only 0 3213 0 272,448,000 272,448,000 249,949,826 Iron ore 3214 0 2,012,160,000 1,152,000,000 363,686,400 3,527,846,400 1,495,946,705 Gypsum 3215 115,000,000 124,000,000 90,960,000 21,800,000 165.370,192 351,760,000 3217 Flint - Fallujah only 0 260,092,800 829,787,659 260,092,800 Alcohol and reagents 3218 100,000,000 100.000.000 100,000,000 100,000,000 400,000,000 74,556,082 Explosives 3219 0 500,000,000 0 500,000,000 1,000,000,000 266,578,224 322 Oil and gas 4,232,800,000 3,856,800,000 2,778,000,000 714,800,000 11,582,400,000 1,196,035,798 Spare parts and maintenance 323,325 1,302,500,000 3,436,200,000 514,700,000 1,863,200,000 7,116,600,000 8,048,629,438 Packaging materials 324 1,575,000,000 5,040,000,000 1,890,000,000 315,000,000 1,260,000,000 6,241,772,169 327 Water and electricity 9,720,000,000 8,100,000,000 6,480,000,000 1,620,000,000 25,920,000,000 1,084,939,698 External services 3,210,067,893 2,675,056,577 535,011,315 2,140,045,262 3,424,072,419 8,560,181,048 Interest 36 239,093,854 838,326,201 755,557,978 707,997,008 2,540,975,040 348,750,698 Depreciation 88,058,605 37 1,072,799,458 1,190,117,598 3,798,908,702 803,908,702 315,982,873 1,131, 950,169 39 Other expenses (mainty prior year adj.) 0 1,608,541,400 45 Capitalised costs for self-construction • (6,003,507,084) Profit (loss) for the year 10.134.589.697 (5,060,058,605) 16,142,185,881 10,748, 199,944 3.993,851,958 33,959,368,875 17.539,096,318 Appendix 3.2 Iraqi Cement Company Projected Profit and Loss Account for the year ending 31 December 2004 Price per ton Price per ton Assumptions: (in 1D) (in ID) In bulk In bag Portland at Kirkuk and Kubaissa 70,000 80,000 * 110,000 White cement at Fallujah 120,000 Sulfure resistant cement at Al-Qaim 80,000 90,000 2004 production is forecasted at only 1.6 million tons Efficiency and productivity gains are not factored in the 2004 projections as the 2004 investments are only to restart the production. Costs reduction are not factored in the 2004 projections as no implementation plan is in place. Sales: 50% in bag and 50% in bulk Kirkuk Kubaissa Al-Qaim Fallujah 2002 Actuall 2004 Projections Projected production for 2004 Head office 500,000 600,000 400,000 1,600,000 2,235,000 100,000 Percentage sold in bag 50% 50% 50% 50% 50% 50% 80,000 120,000 Sale price per ton (bag) 80,000 85,000 70,000 90,000 Percentage sold in bulk 50% 50% 50% 50% 50% 50% 110,000 ¿Sale price per ton (bulk) 70,000 70,000 80,000 75,000 70,000 Revenues 128,000,000,000 11,500,000,000 34,000,000,000 37,500,000,000 45,000.000,000 47,500,701,905 Note I: Total revenues divided by tons sold +-- Iraqi Cement Company Appendix 3.3 Projected Profit and Loss Account for the year ending 31 December 2004 Wage and salaries Assumptions: Average monthly salary (in USD) 200 Exchange rate: USD 1 equals Iraqi Dinars 2,000 Head office Kubaissa Fallujah AI-Qaim 2004 Projections 2002 Actual Number of employees 515 476 720 570 2,850 3,001 Average monthly salaries (in USD) 200 200 200 200 200 95 Exchange rate 2,000 2,000 2,000 2,000 2,000 2,000 2,000 12 months 12 12 12 12 12 12 12 Cost of wage and salaries 3,456,000,000 2,736,000,000 3,456,000,000 2,472,000,000 2,284,800,000 14,404,800,000 6,477,557,354 Iraqi Cement Company Appendix 3.4.1 Projected Profit and Loss Account for the year ending 31 December 2004 Raw materials required Kirkuk Plant Designed capacity (in tons) 2,000,000 500,000 Planned volume in 2004 (in tons) Conversion factor 2.0 Total raw materials required (in tons) 1,000,000 Composition% Quantity required Transportation Cost per (on Limestone 65.9% 658,560 3,067 Clay 282,240 28.2% 480 Silica Sand - Fallujah only 0.0% Iron Ore 1.9% 19,200 20,000 4.0% 40,000 2,000 in -Falliah only 0.0% Raw Materials - Total 100.0% 1,000,000 Cost of RM per ton Kubaissa Plant Designed capacity (in tons) 2,000,000 Planned volume in 2004 (in tons) 600,000 Conversion factor 2.0 1,200,000 Total raw materials required (in tons) Composition% Quantity required Cost per ton Transportation Limestone 1,370 750 61.2% 733,824 Clay 32.9% 825 395,136 0.0% Silica Sand - Fallujah only tron Ore 1.9% 23,040 Gypsum 48,000 4.0% Flint - Fallujah only 0.0% Raw Materials - Total 1,00,000 100.0% Cost of RM per ton Fallujah Plant Designed capacity (in tons) 280,000 100,000 Planned volume in 2004 (in tons) 2.0 Conversion factor Total raw materials required (in tons) 200,000 Composition% Quantity required Transportation 149,760 74.9% Limestone 1,700 Cest Per 120 • 0.0% Silica Sand - Fallujah only 10.6% 10.000 Tron Ore 0.0% 2.000 21.120 8,000 Gypsum 4.0% Flint - Fallujah only 10,000 10.6% 21,120 2,35g 100.0% Raw Materials - Tota 200,000 916,760,000 Cost of RM per to 9,168 Iraqi Cement Company Appendix 3.4.1 Projected Profit and Loss Account for the year ending 31 December 2004 Raw materials required (continued) Designed capacity (in tons) 500,000 Planned volume in 2004 (in tons) 400,000 2.0 Conversion factor Total raw materials required (in tons) • 800,000 Composition% Quantity required Transportation Total cost - RM 64.5% Limestone 516,096 850 1,770,725,376 Clay 27.6% 875 221,184 0.0% 3.8% 30,720 fire Sand - Falian only 50,000 4.0% 32,000 Flint - Fallujah only 0.0% 3.000 Raw Materials - Total 800,000 100.0% 4277.368,576 Cost of RM per ton 10,693/ --.: -- Iraqi Cement Company Appendix 3.5 Projected Profit and Loss Account for the year ending 31 December 2004 Oil and gas Assumptions: 120 liters required per ton 50 ID 50 per liter of oil lead office Kubalssa Kirkuk Al-Qaim Fallujah 2002 Actual 2004 Projections 120 120 120 120 120 Average usage of oil (or gas) per ton 120 120 0 Projected production for 2004 600,000 100,000 500,000 1,600,000 2,235,000| 400,000 50 Cost of oil per liter (in ID) 3 50 so so so 3,600,000,000 600,000,000 Costo foll (or gus) 3,000,000,000 9,600,000,000 2,400,000,000 930,213,973/ Lubricant and grease Assumptions: 90% of produce a in USD) Head office Kirkuk Fallujah Kubaissa 2004 Projections 2002 Actuall Al-Qaim 306,000 226,000 Lubricant and grease required - in tons 41,000 708,000 135,000 Grease (in ID) 350,800,000 406,800,000 73,800,000 243,000,000 1,274,400,000 0 Expensive grease (in 1D) 226,000,000 135,000,000 306,000,000 41,000,000 708.000,000 Cost of lubricant and grease 856,800,000 378,000,000 114,800,000 632,800,000 1,982,400,000 265,821,825 3,856,800,000 Total costs of oil, lubricant and grease 2,778,000,000 4,232,800,000 714,800,000 1,196,035,798 11,582,400,000 Iraqi Cement Company Appendix 3.6 Projected Profit and Loss Account for the year ending 31 December 2004 Spare parts and maintenance Assumptions: Need assumptions for the befow affocation Head office Kirkuk Kubaissa Fallujah Al-Qaim 2004 Projections 2002 Actuall Projected production for 2004 500,000 600,000 100,000 400,000 1,600,000 2,235,000k Need detail for this allocation 687 1,242 216 1,500 2,389 5,040 3,905 3.158 2,605 5,147 5,727 4,658 3,601/ Cost of spare parts and maintenance 1,302,500,000 3,436,200,000 1,863,200,000 514,700,000 7,116,600,000 8,048,629,438 Appendix 3.7 Iraqi Cement Company Projected Profit and Loss Account for the year ending 31 December 2004 Packaging materials Assumptions: No bags produced at lead Office Sales: 50% in bag and 50% in bulk Sales @ SOks per bag - 1 ton with bag per ton for wasta.s Price per bag (in USD) 2002 Actual Al-Quim 2004 Projections Fallujah Kubaissa Kirkuk Head office 2,235,000 400,000 1,600,000 100,000 600,000 500,000 Projected production for 2004 50% 50% 50% 50% 30% 50% Percentage sold in bag 120 21 21 21 21 21 Average usage of bag per ton 0.0233 0.15 0.15 0.15 0.15 0.15 Cost per bag (in USD) 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Exchange rate 6,241,772,169 5,040,000,000 1,260,000,000 315,000,000 1,890,000,000 1,575,000,000 Cost of packaging Tragi Cement Company Appendix 3.8 Projected Profit and Loss Account for the year ending 31 December 2004 Electricity Assumptions: Peak of 100 MGW per hour for all the factories. 180-200 KWH per tonne of cement 300 days (60 for repairs & maintenance) ID 90 - KWH (average cost per KWH: S 0.045 - comparable to CEE and Jordan) 90 Head office Kirkuk Kubaissa Al-Qaim Fallujah 2004 Projections 2002 Actusi Average usage of KWH per ton 180 180 180 180 180 Projected production for 2004 500,000 600,000 400,000 100,000 1,600,000 Cost of electricity per KWH 90 90 90 90 90 Cost of electricity 8,100,000,000 9,720,000,000 25,920,000,000 1,620,000,000 6,480,000,000 1,084,939,698 Iraql Cement Company Appendix 3.9 Projected Profit and Loss Account for the year ending 31 December 2004 External services Assumption: Cost for 2002 will increase by 250% External costs include a substantial part for transportation costs which should increase substantially due to expected increase of cost of fuel Allocated based on tons produced Kirkuk Kubaissa Head office 2002 Actual Al-Qaim 2004 Projections Fallujah Projected production for 2004 500,000 1,600,000 100,000 600,000 400,000 2,235,000 Percentage of increase 250% 250% 250% 250% 250% External services 8,560,181,048 2,675,056,577 3,210,067,893 535,011,315 2,140,045,262 3.424,072,419 Iraqi Cement Company Appendix 3.11 Projected Profit and Loss Account for the year ending 31 December 2004 Depreciation Assumptions: 2004 acquisition of assets is made at beginning of year No acquisition in 2003 Depreciation rate used for 2004 acquisition is 5% or, 20 year useful life 2004 Projections Head Office Kirkuk Fallujah Kubaissa Al-Qaim Combined Cost of fixed assets at 31 December 2002 1,772,473,110 3,567,054,283 4,878,382,596 1,000,346,065 4,921,892,451 16,140.148,505 Accumulated depreciation as at 31 December 2002 (272,915,769) (209,366,892) (1,134,018,859) (315,516,462) (258,454,606) (77,765.130) 3,357,687,391 Net book value of fixed assets asa t 31 December 2002 4,663,437,845 1,499,557,341 15,006, 129,646 922,580,935 4,562,866,134 2002 depreciation 88,058,605 187,200,931 249,033,502 29,732,873 249,882,791 803,908,702 0 Eflective depreciation rate in 2002 Depreciation charge for 2004: Acquisition of assets in 2004 (in USD) 10,029,167 2,862,500 8,829,167 8.229,167 29,950,000 Exchange rate 2,000 2,000 2,000 2,000 2,000 2,000 Acquisition of assets in 2004 (in ID) 17,658,333,333 20,058,333,333 33.725,000,000 16,458.333.333 59.900,000,000 Depreciation rate of 5% of assets acquired in 2004 2004 depreciation for assets acquired in 2004 1,002,916,667 822,916,667 286,250,000 882,916,667 2,995,000,000 2004 depreciation for assets acquired prior to 2004 88,058,605 187,200,931 249,033,502 249,882,791 29,732,873 803,908,702 Total depreciation charge for 2004 88,058,605 1,190,117,598 315,982,873 1,072,799,458 T,131,950,169 3,798,908,702 Iraqi Cement Company Appendix 3.10.1 Projected Profit and Loss Account for the year ending 31 December 2004 Capital investment and interest Investments made ovcr two years Interest rate on USD loan is 4% 50% of loan is received at beginning of 2004 and 2005 Repayment of principal starts in 2005 Kubaissa Fallujah Kirkuk Al-Qaim Price No. Description Total Price Most urgent capital requirements (in USD): Gear with 2 pinions for ccment mill 500,000 1,500,000 1,500.000 Gear with I pinion for cement mill 500,000 500,000 500,000 10 625,000 625,000 625,000 Gear Boxes 2,500,000 625,000 250,000 3 6,000,000 6,000,000 6,000,000 18.000,000 6,000,000 Generator for electricity 4 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Air cooler - affer kiln Air quenching cooler exhaust fan 2 1,200,000 1,200,000 600,000 250,000 250,000 250,000 250,000 1,000,000 Training 200,000 7,875,000 2.375,000 7,875,000 28,700,000 10,575,000 Other capital requirements (in USD): 300,000 Packing machine 1,200,000 1,200,000 + M 300,000 900,000 900,000 Packing machine Packing machine plus accessorie 600,000 600,000 600,000 40 50,000 Compressor Ai 500,000 500,000 500,000 2,000.000 500,000 3 High tension molor 500,000 500,000 1.500,000 500,000 500,000 Shovel - crane 1.666.667 10 1,666,667 1,666,667 500,000 5.000,000 10 1,666,667 1,666,667 5,000,000 500,000 1,666,667 Bulldozer 1,000.000 Dump Truck 1,000,00 300,000 10 3,000,000 1,000,000 Kiln shell @ 4.3 mcler (70 mm) 2 1.000,00 2,000,000 1,000,000 1,000,000 Kiln shell (@4,4 meter (80mm) 1,000,000 1,000,000 1,000,000 500,000 Metallic conveyor (afer clinker) 500,000 2,000,000 500,000 500,000 500,000 On line sampling & quality control system 4 1,000,000 250,000 250,000 250,000 250,000) 250,000 500,000 Upgrade PLC control system 2,000.000 500,000 500,000 500,000 500,000 Environmental dust prevention system for 4 2,000,000 500,000/ 500,000 500,000 500,000 500,000 Boroduction prizes dust prevention for 500,000 500,000 computer equipment 4 500,000 500,000 500,000 2,000,000 9,783,333 8,583,333 3,350,000 31,200,000 9,483,333 17,658,333 5,725,000 16,458,333 Total capital investments in 2004 and 2005 20,058,333 59,900,000 Appendix 3.10.2 Iraqi Cement Company Projected Profit and Loss Account for the year ending 3) December 2004 Capital investment and interest (continued) Kuhaissa Kirkuk Al-Qaim Fallujah Total 2,862,500 8,829,167 Loan reccived at beginning of 2004 (in USD) 10,029,167 29,950,000 8,229,167 4% 4% 4% 4% Interest rate of 4% 4% 2,000đ 2,000 2,000 2,000 2,000 Exchange ratc 658,333,333 802.333,333 229,000,000 706,333,333 Interest charge for new loan 2.396,000,000 Interest charge on existing loans 3,990,376,000 Loans as at 31 December 2002 (366,000,000) Repayment in January 2003 3,624,376.000 Loans outstanding as at 31 December 2003 10,093,854 49,663,675 35.992,868 144,975,040 49,224,644 Interest rate of 4% 239,093,854 707,997,008 838,326,201 Total interest charge 755,557.978 2,540,975,040 kpmg Iraqi Cement Company Status Update 22 November 2003 Saturda Appendix 4) KPMG has utilized 9 staff (four expatriates with a minimum of eight years of experience, one Iraqi with seven years of local audit experience and four Iraqi assistants) during the week of 17 November 2003 and noted the following: Co-operation and access to staff 1 a Working hours are limited for ICC (9:00 - 12:45) • No work on Fridays Closed for EID holiday Management may have limited knowledge of the cement industry as newly hired Printer at Head Office does not work 2 Issues noted for 2003 Financial Information • No financial information prepared • Only monthly G/L debits / credits prepared per factory on a monthly basis • January and February records at the Head Office in Baghdad but no access to date March - October records managed by each factory Cash is currently managed and controlled by each factory Each factory records their basic accounting transactions • Cash at the Head Office has been reportedly stolen 3 Issues noted for 2002 Financial Information • Financial statements have not yet been approved by the authorities • Final version of most of the (sub) ledgers are not accessible to date Final adjustments for 2002 are not recorded in the sub-ledgers provided to KPMG Source documents / original documents are not available (eg. bank statements) Sub-ledgers do not reconcile to the General Ledger (AP, AR, Fixed Assets) Bank reconciliations do not agree to the General Ledger No supporting documentation for provisions to date No supporting documentation for retained earnings and reserves Netting/off-setting amounts included in Accounts Receivable and Payables (ID 58bn) No ageing analysis of Accounts Receivables provided Totals and sub-totals in the Fixed Assets do not add properly Final information on investments (ID 20m) is not available Fixed Assets Roll-forward is not correct Control Weaknesses Identified 4 Accounting and especially IT systems are deficient No monthly financial analysis available for 2003 Management control over the factories may be inadequate Based on our observations and the reports issued by the Board of Supreme Audits, 1 many basic accounting control weaknesses identified and not resolved • Differences between physical and actual counts for fixed assets and inventory • Accounts receivable provision is not adequate Discrepancies between AR / AP confirmations and sub-ledgers Recording errors with cash noted in the prior year kpmg Iraqi Cement Company Status Update 22 November 200. Saturda Appendix 4) Contingent liabilities (US $500k) noted in the prior year Business Issues 5 • Lack of electricity for production Lack of spare parts for plant and machinery Security issues including travel from the city to the plant for employees Training of technicians and management Distance of raw materials (limestone, clay, iron ore) from the plants Oil leakage iberalization of prices of raw materials, electricity, oil, salary, transportatio ignificant capital investment required for maximum capacit Lack of proper maintenance resulting in poor utilization of raw materials Foreign exchange exposure on loans, AR and AP 6 Business Strengths • Plants not looted • High demand for products Monopoly in Iraq and price fixing to reduce imports High selling price per ton Low production costs Well-recognized quality in the region Large number of employees retained from pre-war conditions Return to pre-war capacity (60%-70%) within a week without major investment 7 Potential adjustments identified but not quantified (net equity at Dec 02: US $14m) • Bad debt and inventory provisions • Impairment for idle assets and assets under construction Write off of investments Uncollected outstanding checks received and issued Interest on overdue suppliers' balances Outstanding litigations and claims 8 Way forward • Visit of Fallujah and Kubaissa • Cash Flow Projections for 2004 Balance Sheet and Income Statement for 2002 (and 2003 subject to availability) Preparation of DRAFT deliverables COALITION PROVISIONAL AUTHORITY BAGHDAD Private Sector Development MEMO (b)(6) From To Re Business auditors scope of work Date Sunday, October 05, 2003 Elements of the letter to financial advisors on their potential privatization mandate. Scope of the work The advisors are to deliver the report presenting business assessment of the company being privatizatized, proposals concerning privatization strategy of that company and next to assist the Ownership Transformation Agency in execution of the strategy decided I. Business assessment report should include 1. the company identification data: locations, addresses, telephone numbers, e-mail, website, basic data from the register 2. short history of the company, esp. past ownership changes, mergers, split offs, changes of business profile 3. management bodies of the company, names of managers, their responsibilities, telephone numbers, time of employment in the company, time on the present position, previous position. 4. company's relationship with the Ministry. Level and areas of subordination, prewar and present 5. product (services) profile, i.e. description what are the sources (main and secondary) of company's proceeds. Changes of that profile in time - before the war 2003 and after. Breakdown of sales by types of customers, product type, etc methodology, Review of the markets on which 6. market analysis (e.g. according (b)(6) company operates (market structure, competitors' characteristics, suppliers characteristics, key determinants for success on these markets, market prospects for the future), market position(s) of the company [share(s) of the market]. Prewar and present situation. 7. assessment of present management. Does the DG ar his senior staff have marketing skills to get more projects? Do they need business training to sell the company's services? 8. staff. Number of employees. Breakdown by age, education level, job, period of service. Number of employees qualified for disability and retirement. Salary system 9. financial analysis. Audit of financial statements for 2002 and for the last day of the month preceding submission of this report. If needed, preparation of these documents as of the last day of the month preceding submission of this report 1 10. technical equipment. Physical inventory count if needed. Assessment of the assets from technical and economic point of view. War damages and reparation 11. analysis of technology used - economic and technical perspective 12. working capital analysis covering post-war period 13. cost analysis covering post-war period including fixed and variable costs. Break even point. 14. past, present and potential long term partners of the company: J-V, production co-operation, long term trade relations, etc. Analyses 2 - 14 should be prepared basing on detailed analytical work. The report summarizing these analyses should be presented in concise form (e.g. Power Point presentation) with clear bullet points conclusions. Analysis in points 9 should be also prepared separatedly according GAAP standards. Analysis in point 10 should be (if needed) separatedly prepared in form of detailed list. The authors should be prepared to present working materials confirming their conclusions. Analyses 2 - 14 are not to be prepared for themselves. They must have very clear goal: to make contribution to give the answer for main question: how should this company be privatized (method, timetable, pre- privatization turn-around)? II. Conclusions from analyses 2 - 14 leading to formulation the appropriate privatization strategy III. Valuation of the company relevant to decided privatization strategy Iv. If trade sale decided, preparation of list of potential investors and Offering Memorandum V. Execution of sale under the supervision of Ownership Transformation Agency and with co- operation with lawyers 2 --- - COALITION PROVISIONAL AUTHORITY BAGHDAD September 16, 2003 Request For Proposal Subject: Auditing Services professional level (i.e. partner or accountant) Scope of Work The auditing firm will audit the Company to produce a set of Financial Statements (Income Statement, Balance Sheet and Cash Flow Statement). The financial statements will be prepared in accordance with US or international Generally Accepted Accounting Principles (GAAP). The financial services company will: • Provide a financial statement for August, 2003 in accordance with GAAP • Provide a proforma for the 2004 calender year • Conduct a physical inventory count • Review working capital requirements • Assess the status of fixed assets. • Determine mandatory and discretionary capital expenditure for 2004 • Review internal cash control policies and procedures • An overall assessment of the management's understanding of the company's ability to respond to current market dynamics and its ability to identify and control its cost drivers Requirements • Fluent in Arabic with professional experience in the Middle East • Hire and integrate local Iraqi accountants to the auditing team Duration of the Assigament ! The financial services firm should enter Iraq to commence work within one week of contract award. The scope of work needs to be completed within 21 working days from the date the auditing team enters Iraq. Deliverables At the completion of this contract, the financial service company will: • Provide a set of August, 2003 financial statements in accordance to US or internationally accepted GAAP. A financial statement will be generated for each factory as well as a set of consolidated financial statements • Provide a 2004 calender year consolidated proforma. The proforma should delineate revenue and cost figures for each factory • Provide a written summary report for the items listed in the Scope of Work. Three copies of the items listed above will be submitted in English and Arabic. An Arabic and English electronic copy will also be submitted General • The financial services company will coordinate with the MIM and the Company for site visit schedules • All visits to all locations will be subject to the security situation in the area, The financial services company has the right to reschedule or cancel any of the visits after consulting with the MIM and the CPA • Transportation to the Company facilities to include security will be arranged and paid for by the MIM and the Company Point of Contact for this Request for Proposal: (b)(6) (b)(6) CPA Advisor Private Sector Development Group Coalition Provisional Authority Ministry & Industry Minerals (b)(6) http://www.cpa-iraq.org -.. kpmg Iraqi Cement Company Proposal for audit services Audit & Accounting 23 September 2003 This report contains 25 pages Report for Iraqi Cement Company ! - ! kpng Iraqi Cement Compan roposal for audit service Audit & Accounting 23 September 2003 ! Contents 1 Why choose KPMG? The right team 2 Understanding your business 5 4. 7 Meeting your needs - the right audit approach 4.1 Strategic and process analysis Risk assessment 4.2 4.3 Audit plan and programs Audit test work 4.4 4.5 10 Review and reporting 4.6 Debriefing and follow up 10 5. KPMG's credentials 11 6. 12 Providing value for money Timing 13 Appendices - The resumes of core Team members 14 Report for Iraqi Cement Company! - ! Iraqi Cement Compan kpig roposal for audit service Audit & Accounting 23 September 2003 1. Why choose KPMG? services to ICC for the following reasons: Our knowledge of the cement sector Hakim Al-Adhamy has been the engagement partner for the audits of Qatar National Cement Company since 1997 and United Cement Company (Bahrain). Michel Picard has been involved in the assessment and the valuation of the Cemex subsidiaries based in Spain in connection with the refinancing of the Cemex group. TAS accredited partner Another area of major focus, particular in the first year of our audit, will be a review of your accounting policies to ensure that they are fully compliant with IAS. Michel Picard is one of 200 KPMG partners worldwide who has been accredited to review and approve financial statements prepared in accordance with International Accounting Standards (IAS). This assures consistency in the preparation and audit of IAS financial statements. We have the necessary resources KPMG Middle East has over 1,000 professionals that are trained in the audit of manufacturing, distribution, retail, technology, banking and insurance operations. This ensures a solid basis for providing quality services to a wide range of business sectors. Our staff in the Middle East have gained considerable knowledge in the preparation of IAS financial statements as these are commonly used in the area over the past 20 years. Our proposed team consists of professionals fluent in English and Arabic and includes a number of Iraqis. Risk-based tailored audit approach Our audit process is designed to give you maximum comfort on the risks and issues facing your organisation. It is a no surprises approach based on regular communication. Our audit focuses on the risks inherent in a business strategy and in identifying improvement opportunities. In short, we will make it work for you. Report for Iraqi Cement Company - 23/09/2003 4:47 PM 2 kong Iragi Cement Company Proposal for audit services Audit & Accounting 23 September 2003 High quality audit services Our approach as a business partner: • results in the audit relationship being more than just the independent verification of the financial statements; • assures we understand the strategic focus of ICC and act as a sounding board on business and financial issues; and • ensures performance of a cost-effective audit of the financial statements, which considers the business risks of ICC and the systems, and controls that operate to manage those risks. Our approach focuses on an in-depth understanding of your business. From this nderstanding we can address strategic issues and determine improvement opportuniti‹ enior management requires independent corroboration and feedback on strategic decisio Hakim and Michel and other KPMG personnel, as required, will be available to act as a sounding board to management and assist in the resolution of business issues as they arise. Our commitment to your business Our sat il aly comited in coving your wil the let us far service and Report for Iraqi Cement Company 1 - 23/09/2003 4:47 PRA kpig The right team <PMG will function as a single global team serving the Company. We have developed ou ngagement management structure that provides a proper balance combining appropriat industry expertise with a local focus. 1l the senior members of our team have significant experience, are accustomed to advisin t board level/senior members of management and understand the challenges which confror and business and industry advisers for the Company. Choosing the right people is a key criterion in your decision to appoint auditors. We have brought together an integrated team for the Company made up of individuals with a wide range of experience in the industrial sector and, in particular, in the cement business. Our key people have each been selected to add value to the audit process through their professional and technical expertise. The benefits to ICC of the team we have chosen are: • highly qualified and experienced client and engagement partner; • clear direction to ensure a consistent service; • people who have knowledge of your business needs and have an in-depth experience of the cement industry: and transaction services. 4 Report for iraqi Cement Company - 23/09/2003 4:47 PSt kpmg Iraqi Cement Compan roposal for audit service Audit & Accounting 23 September 2003 Our core leadership team Team member Kule Apperien A Hakim Al-Adhamy Hakim will serve as Engagement Hakim has over 30 years experience Engagement Partner Partner for the audit of the Company, in auditing in the Middle East and the Fellow of the Institute of Chartered He will be responsible for the UK. Hakim, is the engagement Accountants In England and Wales planning and execution of all phases partner of several major audit clients of the audit. in Bahrain and in Qatar, providing audit and advisory services. Hakim is currently the engagement partner of Qatar National Cement Company and of Unided Cement Company (Bahrain). Hakim is the Quality Performance Liasion Partner and the Risk Manager for KPMG Qatar and Bahrain Concurring Review Partner & IAS As Concurring Review Partner, Michel has over 20 years of Michel will ensure that there is experience in providing professional Fellow of the Canadian Institute of Chartered compliance with services to a wide range of clients in standards, KPMG Western Europe, Central and Easter policies and IAS. He will act as a Europe and Africa. He has recently sounding board to the Engagement relocated to KPMG Bahrain to lead Partner on all key technical or other the establishment of an office in iraq. Michel was instrumental in the development of our firm based in Bratislava In addition to the above core team members, we will hire and integrate a number of local Iraqi accountants to the audit team. Hakim has maintained regular contacts with the Iraqi accounting professionals over the past years and especially over the past months. Report for Iraqi Cement Company 1 - 23/09/2003 4:47 PM tragi Cement Compal komg roposal for audit service Audit & Accounting 23 September 2003 Understanding your business Our audit approach is driven by an understanding of your business risks to focus our resources on those areas with the greatest financial risk. The table below summarises our preliminary assessment of the business risks faced by ICC. Each of these translates into a series of potential financial and audit issues as outlined below. We would expect our audit to be focused on the following: Financial and control implications Business rish • Adequacy of bad debt provision Quality of customer base Assessment of credit risk and associated risks Customer concentration exposure Compliance with key customer contracts Valuation of fixed assets and services Procurement Fraud Budgeting control Commitments Adequacy of provision • Law suits Controls over contracting Transparency of IAS financial statements Financial reporting and policies • Evolution of IAS • Compliance of the factories with policies • Consistency of reported information Bridge between Iraq accounts and IAS accounts Managing shareholder expectations Financial targets Assurance over underlying financial processes • Accounting guidance and compliance 1 • Visibility of local forecasts and performance risks Quality of local financial controls Governance and control Role and effectiveness of internal audit Control procedures in various factories Budgetary controls • Risk management controls • Improper decision based on incomplete or incorrect data 6 Report for Iraqi Cement CompanyI - 23/09/2003 4:47 kpmg raqi Cement Compa roposal for audit servic Audit & Accounting 23 September 2003 Business risk Financial and control implications Existence Cash Cash flow requirements Quality of Inventory Adequacy of inventory provision Purchase and disposal of fixed Effectiveness of CAPEX budgets and control over CAPEX assets purchases and disposals Utilization and potential for impairment provision Report for Iragi Cement Company - 23/09/2003 4:47 P kpig Propost or and series Audit & Accounting 23 September 2003 4. Meeting your needs - the right audit approach We will conduct our audit in accordance with International Standards on Auditing. Those conduct of our audit. KPMG's Audit Methodology has an operational and business risk focus. It is designed to aid the efficiency and effectiveness of business operations, as well as address the traditional financial and compliance areas. Some of the key benefits of our methodology include: • Risk-based, business focused approach to audit. This is different from the traditional audit approach which concentrates only on the accounting transactions and practices; • Review of all business risks (financial and non-financial); • Focuses on business processes rather than only accounting transactions; and • Assisting in identifying performance improvement and cost reduction opportunities A highly focused audit plan Increased emphasis on key business risks Well-grounded judgment about key F/S assertions: 6-1-814 Regularly scheduled meetings Frequent, informal communication yea round •Analysis of key business strategie processes Assessment of critical business risks Evaluation of control environments Comparison with industry *best practices" Report for Iraai Cement Company1 - 23/09/2003 4:47 PM komg Iraqi Cement Company Proposal for audit services Audit de Accounting 23 September 2003 The KPMG audit process is diagrammatically presented below: I, Strategk Process Analysts IL. Rist sment. Iraq Cement Company IIT. Audit Plar Reporting Prograrts TV. Audit Test Work 4.1 Strategic and process analysis In this stage we will obtain a high level understanding of: • The Business activities and results of the Company; • The Company's corporate objectives including management's strategy for attaining these. This will involve carrying out the following major tasks: • External forces affecting the organisation, including competition, technology, economic conditions, legislation, etc. • Business relationship with customers, alliances, suppliers and shareholder. • Business objectives and the risks that threaten the attainment of these objectives. • Critical success factors and validating their effect on the business objectives. • The Company's key business processes and the system of internal controls. Report for Iragi Cement Company1 - 23/09/2003 4:47 PB 9 kpig Iraqi Cement Company Proposal for audit services Audit & Accounting 23 September 2003 Risk assessment 4.2 In this stage we will assess the business risks and the management actions taken to address the pries in ding semen or i sa bie od to consider financial mering stingives, perceptions, and judgements about: • Magnitudes and probabilities of the occurrence of events indicated by the business risk; and • Management actions taken to address these risks. Our assessment of risk will cover the inherent risk (the risk that mis-statements, both intentional and unintentional, may occur, disregarding the effectiveness of internal controls to prevent or detect and correct such misstatements) and control risk (the risk that misstatements may occur and will not be prevented or detected and corrected on a timely basis by internal control). We will translate the risks facing the business that have significant implications for the audit into audit objectives. 4.3 Audit plan and programs In this stage, together with you, we will carry out the following tasks: • Specify all the systems and activities to be covered in the period of the plan; • Establish the priority areas;Assess the audit risk in each activity; • Outline the suggested audit approach for each area; and Audit test work 4.4 In this stage the detailed fieldwork will be carried out. We will use a "system based" audit methodology driven by our risk assessment. The methodology includes: • Ascertaining the transaction flows based on the Company's policies and procedures; • Identifying key controls to mitigate the risks identified; • Testing the operation of those key controls. his approach is a well proven method for audit review and with the correct application wi dentify opportunities to "add value' Report for iraqi Cement Company1 - 23/09/2003 4:47 P 10 kpig Iragi Cement Compan roposal for audit service. Audit & Accounting 23 September 2003 4.5 Review and reporting Working papers for all key areas will be reviewed by partners and managers on site to ensure that the conclusions drawn and the depth of work are sufficient. Our reporting is designed to ensure that our work leads to beneficial change. The key features are: • Any serious matters will be reported immediately and followed by a written report; • All draft reports will be issued soon after the completion of the work; • Draft reports will be discussed with the head of accounts to: - Ensure factual accuracy; - Ensure recommendations are practical; - Agree implementation plans for the recommendations made, together with action dates, for inclusion in reports; - Incorporate managers' comments for each matter raised and accompanying recommendation; and • a final audit report will be issued to the company. 4.6 Debriefing and follow up At the end of each assignment we will seek the views of the Company's management on the service we have provided to ensure that we meet your standards for delivery. We will agree with you a set of criteria, measures and a feedback mechanism that will help both of us to manage the partnership effectively. We will carry out reviews following up audit reports from previous visits to ascertain whether all the agreed actions in the previous report have been implemented. Where management has not implemented agreed actions by their target dates, this will be separately reported, together with a further recommended course of action. 11 Report for Iraqi Cement Company 1 - 23/09/2003 4:47 PM - = raql Cement Compa kpig oposal for audit servic Audit & Accounting 23 September 2003 KPMG's credentials KPMG is the global network of professional services firms whose aim is to turn understanding of information, industries and business trends into value for our clients. With more than 100,000 people worldwide, KPMG member firms operate from more than 750 cities in 157 countries. We work in a global market place distinguished by remarkable growth and upheavals. The impact of corporate and accounting scandals and new regulations and laws that are following in their wake - is now being felt around the world. Corporate governance, transparency, effective internal controls as robust financial reporting are key for trust and confidence among shareholders and investors, and achieving profitable growth in an uncertain global economy. There is now demand to extend corporate disclosure into broader, non-financial areas such as stakeholders reporting and remuneration to show the responsibility we all have to employees and the wider communities. There is also increasing pressure to find new ways of realizing the full potential of our businesses, such as the value of intellectual property. At KPMG in the Middle East and through our global network — we recognize and share these concerns, and offer support to Governments, chief executives and other business leaders through the quality, integrity and independence of our work. KPMG in the Middle East has 50 partners and over 1,000 staff in 17 offices throughout the region. KPMG has a long-term and deep commitment to the region. KPMG Middle East is in the process of establishing an office in Iraq. Our offices are staffed with a mixture of nationalities, both national and expatriate, thus maintaining access to expertise of the highest level whilst ensuring that we have the long-term expatriates and nationals necessary to have the requisite understanding of the environment in which our clients operate. One of the cornerstones of KPMG's success in the Middle East is the training provided to staff at all levels, including an integrated training program for all new university graduates who join. Training takes place at KPMG International and at the Middle East Training Centers, and covers the most up-to-date procedures in Assurance, Financial Advisory Services, Tax and Legal, and Consulting. Local presence and thorough knowledge of the respective industry ensure that our solutions and concepts are precisely tailored to the concrete situation of each client we serve. This enables a seamless service along the value chain clients. Our market position is the result of our consistent focus on the aspects that are most 1 for the success of our clients. Thus we can shape the future together. Report for Iraqi Cement Company - 23/09/2003 4:47 PM | kong Iraqi Cement Compan roposal for audit service Audit & Accounting 23 September 2003 6. Providing value for money Ve will deliver a first class robust audit with high quality service throughout the engagemen Jur proposed hours for the specific services requested are set out in the table below. Your requirements Ilours Assistance in the preparation and audits of the consolidated financial stateme fIC and of the individual (company) financial statements as at August 31 203, profit in odordance in mermainal Stairs on And insands: 500 Assistance in the preparation of a proforma profit and loss account for th nancial year 2004, on a consolidated basis and for each factor 120 3. Review internal cash control policies and procedures in place 50 4. Asses the status of fixed assets and determine mandatory and discretionary 20 capital expenditure for 2004 140 5. Conduct a physical inventory count at each factory 6. Overall assessment of the managements' understanding of the company's ability to respond to current dynamics and its ability to respond to, identify anc control its cost drivers 20 850 TOTAL HOURS Our report will be submitted in English and Arabic. An electronic copy will also be submitted. We propose a fee of USD 55,000 for the services mentioned above, excluding outlays and VAT (or local equivalent) which will be billed separately. The proposed fees includes a significant discount on our standard rates for similar engagements. The hourly rates, after our discount, for each professional level are as follows: Level Kate Partner USD 175 USD 100 Manager Supervisor USD 60 Experienced staff USD 40 USD 20 Local Iragi staff Report for Iragi Cement Company 1 - 23/09/2003 4:47 PM kpmg Iraqi Cement Compan roposal for audit service udit & Accounti 3 September 201 7. Timing 14 Report for Iraqi Cement Company 1 - 23/09/2003 4:47 PM kpmg Iraqi Cement Company Proposal for audit services Audit & Accounting 23 September 2003 (b)(6) 15 Report for Iragi Cement CompanyI - 23/09/2003 4:47 PM kpig Iraql Cement Company Proposal for audit services Audit & Accounting 23 September 2003 (b)(6) Report for Iragi Cement Company1 - 23/09/2003 4:47 PM 16 kpmg Iraqi Cement Company Proposal for audit services Audit & Accounting 23 September 2003 (b)(6) 17 Report for Iraqi Cement CompanyI - 23/09/2003 4:47 Ph6 Iraqi Cement Company kpmg Proposal for audit services Audit & ocountina (b)(6) 18 Report for Iragi Cement Company1 - 23/09/2003 4:47 PM kpng Iraqi Cement Company Proposal for audit services Audit & Accounting (b)(6) Report for Iraqi Cement Company - 23/09/2003 4:47 PM8 19 kpmg Iraql Cement Company Proposal for audit services Audit & Accounting 23 September 2003 (b)(6) Report for Iragi Cement CompanyI - 23/09/2003 4:47 PAQ 20 - kpng Iraqi Cement Compar roposal for audit servic idit & Accounti 3 September 20 7. Timing We will enter Iraq to commence our work within one week from the signature of the contract. We expect to provide you with draft reports of our deliverables within three 24 Report for Iragi Cement Company1 - 23/09/2003 4:47 EM (b)(6) Private Sector Development Group Coalition Provisional Authority Baghdad PERSONAL AND CONFIDENTIAL - 23 September 2003 Dear (b)(6) We are delighted to have been asked to submit this proposal to act as auditors and business advisors of Iraqi Cement Company (ICC). As an important high profile player in the reconstruction of Iraq with ambitious objectives for the future, ICC is precisely the kind of forward-looking organisation we want to work with and which KPMG genuinely excels at serving. This is a real opportunity for ICC to gain the benefit of an international approach to its audit. We firmly believe that our team can and will provide you with the type of value-for-money service which you expect. Our belief is based on the following reasons: • We approach this opportunity with the intention of being a business partner and an advisor to the Iraqi Government; • The core team has an in-depth experience of your industry whose members have the time and the commitment to serve; • Our audit approach is a risk-based methodology that ensures we focus on the areas of highest risk and of most significance to the business; • We will give you feedback on your processes and people and will be available for open discussions with your team; • KPMG Middle East is proficient in the preparation of financial statements prepared in accordance with International Accounting Standards (IAS). I am one of the 200 KPMG partners worldwide who has been accredited to review and approve financial statements prepared in accordance with IAS. • I have gained considerable knowledge of a country in a transitional phase from a planned economy to a more Western style economy. During my eight years in the Slovak Republic, I have been privileged to witness the tremendous development of the country, including the flotation of the Slovak currency, the election of a democratic government, the privatisation of the banking sector and most of the state-owned companies, the liberalisation of the prices, acceleration of FDI and the development of a solid market economy; and • have recently relocated from the Slovak Republic to KPMG Middle East mainly based in Bahrain with the objective to establish a KPMG office in Iraq in the near future. Our presence in the country will be useful in our future communication and discussions. Everyone in our team is enthusiastic about the prospect of working with ICC. It is a challenging vet exciting time for the company and we look forward to further demonstrating our commitmen to ICC and IRAQ. Should you have any questions or queries, or wish to discuss any aspect of our proposal then please do not hesitate to contact me on +(b)(6) Yours faithfully (b) (6) Partner KING • I have gainod considerable knowledge of a country in a transitional phase from a planne economy to a more Western style economy. During my eight years in the Slovak Republic, have been privileged to witness the tremendous development of the country, including the et excing time fortie company a boe to forward to further ge win as our coallenging to ICC and IRAQ. Should you have any questions or queries, or wish to discuss any aspect of our proposal then please do not hesitate to contact me on +973 965 2204. Yours faithfully (b)(6) Partner Mr. Mohammad Rahim Tawfeq Interim Minister Ministry of Industry and Minerals Baghdad, Iraq 12 October 2003 Dear Mr. Mohammad Rahim Tawfeq Compilation of a balance sheet as at 31 August 2003 and preparation of prospective financial information for the period from 1 September 2003 to 31 December 2004. In reference to your letter dated 16 September 2003, our proposal dated 23 September 2003 and our subsequent meeting on 4 October 2003, the purpose of this letter is to confirm our understanding of the terms of our appointment and the nature of the services we will perform for you. The scope is as follows: • To compile a balance sheet of Iraqi Cement Company ("the Company" or "ICC") as at 31 August 2003; • To assist ICC in the preparation of Prospective Financial Information ("PFI") for the 16 month period ending 31 December 2004; • To review the internal cash control policies in place and prepare a short report on the weaknesses identified; • To conduct a physical inventory count of the inventory and property, plant and equipment and prepare a short report on the conditions of those assets; and • To perform an overall assessment of the management's understanding of the company's ability to respond to current dynamics and its ability to respond to, identify and control its cost drivers and prepare a short report of our assessment. Our deliverables will be submitted in English and Arabic. Professional standards We conduct our engagements in accordance with the principles of independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour and technical standards as defined in the technical pronouncements of the International Federation of Accountants. (b)(6) SIGNED ENGAGEMENT (b)(6) LETTER... HAS MORE DETAILS. (b)(6) Scope of compilation We will compile the balance sheet of the Company in accordance with the International Standards on Auditing applicable to compilation engagements on the basis of information provided by you. We will not carry out audit or review engagement procedures or otherwise attempt to verify the accuracy or completeness of such information. Our report on the balance sheet of the Company is presently expected to read as follows: 'On the basis of information provided by the management we have compiled, in accordance with the International Standard on Auditing applicable to compilation engagements, the balance sheet of ICC as at 31 August 2003. Management are responsible for the information reflected in the balance sheet. We have not audited or reviewed the balance sheet and accordingly express no assurance thereon.' Scope of the assistance in preparation of the Prospective Financial Information (PFD We would assist ICC in preparation of the PFI, which would basically involve construction of a for the period of 16 months ending 31 December 2003. 2004 We would like to highlight that the role of KPMG would be limited to the preparation of the financial model based on the discussion carried out with senior management team. KPMG's assistance in development of the financial model shall not be construed as expression of its opinion with respect to the reasonableness and achievability of the same. Responsibility of management You, as management, are responsible for both the accuracy and completeness of the information supplied to us and responsible to users for the financial information compiled by us. This includes the maintenance of adequate accounting records and internal controls and the selection and application of appropriate accounting policies. Our engagement cannot be relied upon to disclose whether fraud or errors, or illegal acts exist. However, we will inform you of any such matters which come to our attention. We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information we request in connection with our compilation. Before starting the compilation of your balance sheet we shall require your accountant to prepare a tallied trial balance and certain schedules, listings and analyses, the form and contents of which we shall explain to him as well as giving him draft format. Timing Provided no unforeseen major problems are encountered especially with the security in Baghdad, we expect to be able to start our work within two weeks of signing this agreement and deliver the draft balance sheet, prospective financial information and other reports within dates to be agreed with the Management. However if the security does not allow our team to perform our work in accordance with the plan and timetable then we reserve the right to reschedule or cancel any of the visits after consulting with the contracting parties without penalties to KPMG Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement. Individual hourly rates vary according to the degree of responsibility involved and the experience and skills required. Our invoices are due and payable on receipt. We expect our total fees to be USD 55,000 plus outlays and any taxes applicable to Iraq, payable as follows: • 50% on commencement of the work; and • Balance 50% on delivery of the draft deliverables. Should there be any delays in the provision of information by the Company, should other issues arise which require additional work to be performed by KPMG or should delays arise from any other cause outside our control, we shall discuss such matters with the Company and shall have the right to defer completion of the work and the Engagement letter until the matters are resolved. In the event of delays and/or additional work being required of KPMG arising from these reasons, we have the right to request additional fees needed to complete the Engagement letter based on the additional time spent and hourly rates of particular employees. Applicable law This engagement shall be governed by, and construed in accordance with the Bahrain relevant laws. The Courts of Bahrain shall have exclusive jurisdiction in relation to any claim, dispute or difference concerning this engagement and any matters arising from it. Each party irrevocably waives any right it may have to object to an action being brought in those Courts, to claim that the action has been brought in an inconvenient forum, or to claim that those Courts do not have jurisdiction. Administration Responsibility for this engagement will be carried out by suitably qualified staff. We aim to provide you with the best possible service and Abdul Hakim Al-Adhamy, as engagement partner, will seek to ensure that this is satisfactory at all times. If however, at any time you are unable to deal with any difficulty through him please let us know by contacting our managing partner Michel Picard. Confidentiality We are well aware of the importance that you place on confidentiality requirements and we have a proven record of maintaining a strict code of confidentiality. Our policy requires that affairs of clients be confidentially kept at all times and the only exceptions are when the following conditions are met: • The client has authorised disclosure in writing; There is a professional duty to disclose; • Disclosure is required by a legal or judicial process; and • Disclosure is required by law. We appreciate the opportunity to be of service to you and we emphasise our commitment to provide you with quality services in an efficient and timely manner. Yours faithfully Michel Picard Partner Acknowledgement on behalf of Iraqi Cement Company 23.10.03 Mohammad Rahim Tawfeq Date Weakly update for SOEs Companies. Food Industries sector. ACH Achi Pro Producti The work is being resumed only in the 1 State Co. for Vegetable Oil Industries. morning because of the security 23 Tons. Oil. situation.Development in the production 70% 60 Tons Soap. 42 Tons 33% comparing with the previous week. 462 Tons. Detergents. 152 Tons 46% Their sellings were 70 MID. Liquid detergents 92 Tons 42 Tons 49% Cosmetics 3.4 Tons 7 Tons Mosul & Kadisia plants are are not working 2 State Co, for Dairy products. till now because of the disavailability of raw 4 Tons Milk Cream. 33% materials. The electricity is unstable in 3 Tons 9 Tons Butter. 50% Abu-Ghareeb plant. The achieved sellings 1 Ton 5 Ton 32% were 11.4 MID. Cheese. 3 Tons 9 Tons 15% 1.6 Tons. 11 Tons Yogourt. Reduction of the production because the 3 State Co. for Tobaccos & Cegarettes. 16% generator is out of order. The achieved selling 4200 Carton 688 Carton Cegarettes. 56% were 10.8 MID Matches. 507 Carton 900 Carton 3 Tons 15% The achieved sellings were 1.64 MID. Bread yeast. 18 Tons 4 State Co. for Sugar Industries. 1500 liter. 12,777,000 76% There is somehow a development in the Pills 16,750,000 5 Samara State Co. for Drugs. Tablits 54% production comparing with the previos week. 4,250,000 2,290,000 125,000 37.000 Powders 30% Reduction of production for some drugs is 250,000 417,000 Syrup 167% due to rehabilation & Shortage in raw materials. 47,000 62,000 76% The achieved sellings were too low comparing Oral drops 41,000 31,000 eye drops 76% with the production (no more than 59 MID) Creams 166,000 172,000 104% because of the limitation in markets. 31,000 14,000 14,000 100% 6,000 100% 12,000 12,000 1,000 37.000 Pills 7,500.000 63% Ninavah State Co. for Drugs. 4,750,000 900,000 36% Tablits 2,500,000 48,000 Syrup 38% 125.000 Oral Drops 50,000 26,000 113,000 23% Creams 125,000 75,000 Eye Drops. UNCLASSIFIED COALITION PROVISIONAL AUTHORITY BAGHDAD TRIP REPORT 1 November 2003 FOR: SEE DISTRIBUTION FROM: (b)(6) Deputy Advisor/LNO Ministry of Industry and Minerals SUBJECT: Ministry of Industry and Minerals Trip Report A CPA Ministry of Industry Team (b)(6) with an traveled north from Iraqi Ministry of Industry staff (b)(6) the 26* to the 31* of October to discuss the following issues: A. Distribution and Pricing of Cement a. Mosul. The combined MIM team met with the Mayor of Mosul and local council attendance and others) on 27 October to discuss the pricing and distribution of cement. The combined MIM team met with the 101" Commander and Assistant regarding pricing (as well as security and labor-management issues). ii. The combined MIM team expressed the position that the high price for cement would offset the large margins the local black market currently enjoys. This would eliminate black market activity. The 101 agreed that the issue required a supply side response allowing for: 1) higher prices in the short run by the cement factory to allow for available capital to rehabilitate the plant and 2) flooding the market with cement (using the good offices of a local reputable wholesaler) with imports. iii. The MIM met with the City Council to discuss the issue of pricing. The message was the MIM could achieve a level of production by late summer 2004 to In materially affect the level of supply and thus the lowering price of cement. the end the civil leadership agreed that it would defer to the MIM regarding this issue. b. Kirkuk. The combined MIM team met with the Mayor of Kirkuk and local council members along with members of the 173' Brigade (CMOC staff) to discuss the pricing and distribution of cement. The discussion raised the following issues: i. The Mayor stipulated his position that as long as the Kirkuk Cement operation was a SOE he would treat it as a public interest of Kirkuk and be involved in its operations (question is one of oversight vs. supervision). He would want a say in (b)(6) UNCLASSIFIED UNCLASSIFIED the distribution of cement. The City Council has also been involved in personnel matters of the firm (see security paragraph). This is not the intent of Bremer's 6 September memo. ii. The MIM team welcomed the oversight but not the supervision of the factory by the civil leadership. The MIM's agenda is to see the firm placed on a sound commercial footing (in accordance with the CPA strategic plan) and this would require a laissez faire approach by the local civil leadership. iii. The Mayor expressed concern about the distribution of cement (the allocation ends up in the black market) and would prefer to see the firm provide a controlled distribution to an end user (through a mechanism set up by the civil leadership). Since quotas are preferred to price controls this would be welcomed. iv. The Kirkuk plant suffers from its proximity to Sulimaniya regarding the pricing issue where cement sells for $25 a bag. In Sulimaniya the Kurdish Prime minister thru the Kurdish MIM has set a price ceiling as well as controlled distribution. The Kirkuk leadership would prefer a similar arrangement. v. It is recommended that a joint commission will be formed by the local civil and MIM leadership to review the above and other allegations of corruption. vi. The local civil leadership expressed their concern about price controls as a means to regulate the black market. They indicated empirical evidence of factory price increases being followed by black market price increases. This suggests that a well established cartel exists that controls the distribution of cement and thus the pricing of cement. B. Mishraq Sulfur. On 26 October the Combined MIM Team met with the 101" Brigade Commander and the plant leadership to integrate efforts to get the plant up and running. a. This firm is the most viable entity in the MIM portfolio. It recently sold $22 million in sulfur and has another $66 million in ready inventory remaining. It sits on an estimated $25 billion of sulfur. b. The Brigade Commander challenged the MIM team to reinvest sooner in the plant's rehabilitation (suffering from $25 million in looting and repairs) and to invest on a broad front (security, production equipment, etc.) and not phase the investment and rehabilitation process. The brigade commander committed to having a detachment of 101* soldiers on the ground to begin the process. c. The 101" will be involved with the local plant management to assist in the reconstruction effort (bidding, oversight). d. The key to the rapid rebuilding of Mishraq is to ensure the sale proceeds are provided to the SOE for reconstruction and not diverted to the MoF. C. Geological Survey and Mining. On 27 October and 28 October the Combined MIM Team met with the Ministry of Industry and Minerals in both Irbil and Sulimaniya respectively. The tean was joined by the Director General of the Geological Survey and Mining Company a. The Geological Survey will be reclassified by Private Sector Development as a government agency. This reclassification has not been formalized. However it will nee funding for its activities for 2004. Since the 2004 budget has been published, it i: issumed that this funding will come from the available pool of money for the SOE' The funding requirement is $4 million for capital expenditures and 2.5 million fo (b)(6) UNCLASSIFIED UNCLASSIFIED b. The Geological Survey would like to survey the Kurdish regions and outlined his plan to the Ministers. He also requested from the regional ministries financial support for the effort. D. Security A. Mishraq Sulfur - We met with (b)(6) 101 AASLT, 1 BCT FPS coordinator at the Mishraq site. He reported there were 271 FPS working at the site. He indicated that uniforms and weapons were available and would be issued soon. The MIM issue at this site is the lack of loyalty of the FPS toward the DG. Mr. Ali spoke with the FPS supervisor, a local tribal leader named Sheik Azeez Sinjar. The dialogue indicated that Mr. Sinjar wants to act as a power broker, deciding what he will and won't secure and also who will work at the site. Mr. Ali made it clear that if the FPS loyalty is to anything or anyone other than MIM and the DG they will be fired. The agreement reached was that the FPS here will undergo a two month "probation" and if their loyalty and performance are satisfactory, the MIM will assume their payroll on 1 January, if not they will be fired. A written assessment of the security plan for the site is also to be prepared by the FPS in conjunction withb (6) B. Badoosh Cement - We met with (b) (6) 101 FPS coordinator and 2 BCT commanders respectively, at City Hall in Mosul. The DG of Northern Cement explained that he was not satisfied with the 101 trained FPS at his site (currently 70 FPS on site). The agreement reached is that the local battalion commander will work more closely with the DG and support his decisions with coalition force provided he consults the commander first. The 70 FPS will be picked up by MIM payroll in the near future. The DG has some trouble expressing his real position to the ground commanders. This is something that must be overcome or the DG will find the patience of the local commanders exhausted with his frequent cries of wolf. the 173 area commander C. Kirkuk Cement - We met with (b)(6) and 173" Team Civil leader respectively. The 173" explained that it has trained no FPS in its AOR. Mr. Ali explained that we were unable to train FPS at this location because the DG refused to allow our trainers in. There is a guard force at the site (approximately 40) which will have to be trained. At this point the only option is to bring these employees to Baghdad and train at the FPS Academy. The issue of Kurd discrimination against Arab FPS supervisors was also raised. The DG said he could not accept the FPS supervisor because the Governor would not allow him. The Governor said it was the decision of the City Council of Kirkuk. This issue is not resolved. D. Geological Survey - Mr. Humam, the DG of Geo Survey, explained a plan to survey areas within the Irbil Governorate. Two issues affecting the proposal are mine hazards and the PKK threat. For follow up on these issues MIM will coordinate with the Mine Action Group at CPA and try to coordinate weapon permits for the 101 AOR so that the geo survey team can secure itself. E. State Owned Enterprise Operations. The Combined Team message to the military leadership of the 101" and the 173 was that they support their local SOE. The intent is to put these companies on a sound commercial footing and that the SOE was in the short term in control of its destiny. The decisions of the DG and the SOE Board of Directors should not be second guessed. This was particularly important in personnel and operational matters. The factory floor consists of so many factions (tribal, religious, party) that it is impossible to please all parties. The local leadership must support the plant management going forward in all their decisions. (b)(6) UNCLASSIFIED - - - ... l UNCLASSIFIED DISTRIBUTION: Commander 352" CACOM Commander 352"* CACOM Attn: Economics and Commerce Team Director, Private Sector Development Senior Advisor Ministry of Industry and Minerals Chief Of Staff, CPA ATTACHMENTS: COORDINATION: (b)(6) UNCLASSIFIED KPMG Iraqi Cement Company status Uodat Saturday, 22 November 2003 :P.MG has utilized 9 staff (four expatriates with a minimum of eight years of experienc ne Iraqi with seven years of local audit experience and four Iraqi assistants) during th weck of 17 November 2003 and noted the following: Co-operation and access to staff • Working hours are limited for ICC (9:00 - 12:45) No work on Fridays Closed for EID holiday Management may have limited knowledge of the cement industry as newly hired Printer at Head Office does not work 2 Issues noted for 2003 Financial Information • No financial information prepared • Only monthly G/L debits / credits prepared per factory on a monthly basis January and February records at the Head Office in Baghdad but no access to date March - October records managed by each factory Cash is currently managed and controlled by each factory Each factory records their basic accounting transactions Cash at the Head Office has been reportedly stolen 3 Issues noted for 2002 Financial Information Financial statements have not yet been approved by the authorities Final version of most of the (sub) ledgers are not accessible to date Final adjustments for 2002 are not recorded in the sub-ledgers provided to KPM Source documents / original documents are not available (eg. bank statements) Sub-ledgers do not reconcile to the General Ledger (AP. AR. Fixed Assets) No supporting documentation for provisions to date No supporting documentation for retained earnings and reserves Vetting/off-setting amounts included in Accounts Receivable and Payables (ID 58bn) No aveing analvsis of Accounts Receivables provided Totals and sub-totals in the Fixed Assets do not add properly Final information on investments (ID 20m) is not available • Fixed Assets Roll-forward is not correct 4 Control Weaknesses Identified • Accounting and especially IT systems are deficient • No monthly financial analysis available for 2003 Management control over the factories may be inadequate • Based on our observations and the reports issued by the Board of Supreme Audits, many basic accounting control weaknesses identified and not resolved Differences between physical and actual counts for fixed assets and inventory Accounts receivable provision is not adequate Discrepancies between AR / AP confirmations and sub-ledgers Recording errors with cash noted in the prior year • Contingent liabilities (US S500k) noted in the prior year Iraqi Cement Company Status Update Saturday, 22 November 2003 5 Other Issues Noted • Sales to employees below market price Business Issues 6 • Lack of electricity for production • Lack of spare parts for plant and machinery Security issues including travel from the city to the plant for employees Training of technicians and management Distance of raw materials (limestone, clay, iron ore) from the plants Oil leakage Liberalization of prices of rau materials, electricity, oil, salary, transportation Signiticant capital investment required for maximum capacity Lack of proper maintenance resulting in poor utilization of raw materials • Foreign exchange exposure on loans, AR and AP 7 Business Strengths • Plants not looted • High demand for products Monopoly in Iraq and price fixing to reduce imports High selling price per ton Low production costs Well-recognized quality in the region Large number of employees retained from pre-war conditions Return to pre-war capacity (60%-70%) within a week without major investment 8 . Potential adjustments identified but not quantified (net equity at Dec 02: US S14m) • Bad debt and inventory provisions • Impairment for idle assets and assets under construction Write off of investments Uncollected outstanding checks received and issued - Interest on overdue suppliers* balances Outstanding litigations and claims 9 Way forward • Visit of Fallujah and Kubaissa • Cash Flow Projections for 2004 'Balance Sheet and Income Statement for 2002 (and 2003 subject to availability) • Preparation of DRAFT deliverables Iraqi Cement Company Balance sheet As at 31 December 2002 and 2001 2002 2001 Non-current assets 2.598.469.218 Fixed assets 14.994.081.268 4.089.126.085 95.574.273 Building under construction Deferred expenses 12.048.396 3.806.794 Long-term investments 40.000.000 40.000.000 Total non-current 19.135.255.749 2.737.850.285 Current assets 33.550.394.768 29.852.431.401 Inventory 210.732.147 4.629.828.930 Letter of credit Receivables 37.708.634.683 60.163.385.705 7.999.891.127 2.174.909.866 Cash and banks 69.946.708.097 106.343.500.530 Total current assets 125.478.756.279 72.684.558.382 Total assets Equity 1.523.000.000 1.523.000.000 Share capital paid 27.297.715.965 Reserves 6.804.738.027 28.820.715.965 8.327.738.027 Total equity Non-current liabilities 3.990.376.215 Bank loans 5.349.000.000 10.823 10.823 Long-term provisions 5.349.010.823 3.990.387.038 Total long-term of liabilities Current liabilities 91.373.849.465 Payables 52.847.479.161 1.293.803.811 3.728.753 Provisions 0 6.156.601.618 Bank loans 92.667.653.276 59.007.809.532 Total current liabilities 125.478.756.279 Total of liabilities 72.684.558.382 = Iraqi Cement Company Profit and loss account For the years ended 31 December 2002 and 2001 2001 2002 38.925.312.720 52.033.872.107 Revenues 26.057.595.703 17.794.620.266 Costs of production 7.615.582.199 5.659.899.485 Services -552.391.656 -2.113.547.261 Variation of WIP -1.999.965 Sales of scrap 29.601.947.962 24.857.810.809 Costs of production 126.568.744 -139.100.762 Variation of finished goods 24.718.710.047 29.728.516.706 14.206.602.673 22.305.355.401 Gross margin 1.254.385.211 410.716.867 Marketing expenses - .. 1.977.534.640 Administration costs 3.234.484.926 10.974.682.822 18.660.153.608 265.448.939 202.866.366 Processing revenues 284.634.724 97.741.545 Other revenues - 363.190.484 487.501.090 28.845.930 616.000 ssing expenses 92.949.794 1.607.922.405 - .... expenses 121.795.724 1.608.538.405 17.539.116.293 11.216.077.582 Net income IRAQ Cement - 100m 2 2000002000 4 plants. Whitlement - 1 это, оточ - Securty- - 5.27 millins.- 50% 2s/ Ton I So/Ton -electricity - problem- - 160,020,00 Cos dune $20000,000 to 65,000,000 git génerators 60% - 2004- Highleman - 7,000,000 2002 2003 2004 - 710,020,00. 10,020,000 2004 Upgradingsystem 15% 10,000,000 NELSO 80%-2005 MULLIN 425,00,000. www.nmrs.cor 800.237.200 Needs #12000,000. now. Fireneit i Compay Name: NORTHREN CEMENT CompANy Product, Portland Cement. Design Capacity 1 Year: 4,500,000 Tons (Three plante) Actual Capacity Year: 1800, 000-2,0916 $50 UsD/ ton. Estimated price : Estimated Cest: # 50, 000, 000 USD 90,000,000 - 100,000,00 Total Rewenue = USD Notes It aramd $10, 000, 000 US ias extre bugde, the production capacity exced about 30-35%, the ALRA MOHEMED ALTUFILY D •G 30/8/2003 ISOMW Dair Southeun Cenet - 8 Fatoris. 1-Lime - 12,00 Tms pe year. 7-cement. parttono - 6.4 millim toris - suphur 60% - Lisign - 5,300 éplogees - $2000/430.00 -Costs 1 10,000,000 # 5,000,000 - repair damage # 5,000,000 - genenitos for milling. NELSO MULLIR www.nmrs.cor 800.237.2000 25mW now Northenss Cenarl - 3plants 400 kMs - 45/Tons Design #50/Ton 18/20 - capiity $ 90,000,000. - 2,000 Tons 210,00, 000. - Lore parene - Uplato cento in hautes - NELSC MULLI www.nmrs.r 800.237.2 CPA South Industrial Development (b)(6) From: (Trade & Industry) Dep. - (Industrial Development) Sect. Date: 07.12.2003 Subject: General report related to the status and actions to boost the production in the basic industry strategic plants in the south of IRAQ Introduction: This document is issued to give guidance to the various CPA pillars and private entities in view of a coordinated action to boost the production of the basic industry in the south. Due to the timing extremely compressed, the end of June 2004, and the uncertain strategies of the Iraqi Ministries after the end over of responsibility and governance by CPA, this document is considering only the possible, effective actions to be undertaken in the next seven months. This actions should be limited merely at the support to identify the bottle necks in the production process of the plants and to launch projects, like supply of equipment and spare parts to eliminate the constrain. During our surveys started at the beginning of November, two mayor problems was focused as the principal cause of plants reduced or non operation. These problems are the lack of steady stable and constant electrical supply as well as for gas. These two points are the most critical ones because they are involving the work and strategy of different players, TF RIO for oil & gas, TF RIE, Bechtel, Mott Mc Donald for electricity, therefore the direction and time schedule for each program related to these fields might effect the production of the considered plants. (b)(6) CPA South Industrial Development Status of each plant and actions to be undertaken. Integrated steel plant. See attach. (1 The plant is an integrated steel complex located in Kor Az Zubayr designed to produce 400,000 Tons/year of carbon steel in form of long products, rounds and sections. It was designed, installed and commissioned by the French group CRUSOT LOIRE in the 1974. The plant has 4,845 employees and was producing before the war 60,000 Tons/year of steel for military purpose, the maximum production was 200,000 Tons/year. Status The plant is completely looted, is in bad condition for what is concerning the electrical and instrumentation part that has to be redesign and reinstall completely, moreover some processes are old and not any more profitable, for example the direct reduction plant and the melt shop, those parts of the plant have to be extensively modified from a mechanical and process point of view, however the rolling area is still in a good shape and with the installation of new electrical equipment and automation can produce rounds and profiles with acceptable quality standards, necessary condition for the working of the rolling mill is the rehabilitation of the water treatment plant, compressed air plant, and distribution substation. Actions The above mentioned works cannot be undertaken under the frame of a local contingency plan, the involvement of a specialized company is necessary to investigate in detail the process and undertake the necessary extensive works for the rehabilitation of the plant in accordance to the actual quality standards, reliability and efficiency. Splitting of the plant in several process area can be taken in consideration due to the different damages suffered by the equipment, however the auxiliary services have to be rehabilitated almost completely whatever part of the process they have to supply. In conclusion this installation need extensive investments and the involvement of big multinational companies specialized in the steel plants sector, nothing can be done with contingency plans in within the next seven months, the destiny of the complex will be a decision of the new iraqi government. (b)(6) CPA South Industrial Development Spiral welded tubes plant It is a separated unit of the integrated steel plant, this production unit is situated near Um Kuasr port and will be visited by our team this week. Al Muthanna Cement Factory attach. (2 The plant located near As Samawa city, Grid. NV 004 545, has two lines for dry type cement production process, designed to produce 2,000,000 Tons/year of Portland cement, high tension cement and sulfate resistant cement. It was designed, installed and commissioned by the German company KHD in within the 1982 -1984. The plant has 850 employees and now is producing 1800 tons/day of cement equal to 360,000 tons/year of cement considering an availability of electrical energy of 200 days/year. Status The plant is adopting a good and rather modern technology, it is in a good shape compared to other installations in the country and with some little rehabilitations and parts replacement will be able to produce 1,000,000 tons per year with one production line in full operation. The production of cement is very precious for the reconstruction of the country, at the contrary of the steel melt shop were little is left for the contingency plan, is possible for this factory to apply some corrective action to boost the production at the level mentioned. Actions To reach 1,000,000 tons per year of Portland cement the following action has to be undertaken: The plant need stable and reliable supply of electrical energy. The energy required is 15 Mw more in addition to the already available power, this can be done easily trough the Kadisia substation, rising the power supply setting from 10Mw to 25Mw, proper coordination with Baghdad is needed to allow the IEC, Iraqi Electricity Committee to dispatch the necessary orders. A project of 4.5 Mio of US$ has been approved by CPA south for the supply of the necessary excavating equipment for the quarry. The project need to be push forward in Baghdad as a matter of priority. During our team last visit a detailed list of spare parts as been requested to the management, this list is not yet produced to the CPA South, further actions and pressures has to be applied trough the project officer, Cap. Serge Doreleyers RNLMC to receive this list and approve a project for the purchase. b) (6) CPA South Industrial Development Petrochemical plant The plant, located near Kor Az Zubayr city, grid QU 61 58, was designed, installed and commissioned by a JV between the American LUMMS and the German Thyssen in the 19/9, but due to the Iran - Iraq war was started up only in the 1988. The plant has five different processing lines for the following products: • Low density polyethylene • High density polyethylene • Ethylene Plastic sheets for crops covering • Chlorine • Soda P.V.C. • Hydrolytic acid HCL The number of the personnel is 3379. The plant is in relative good shape, it was interested by a extensive extraordinary maintenance program during the year 1992, he reached the maximum production in the 2001, about 45% of the designed production, just before the last war the water cooling pipes was renovated and substituted. Status The plant is ready to restart the production of plastic sheets, chlorine, low and high density polyethylene. Actions Two are the key factors to restart the production: 1. 30 Mw of steady, stable and uninterruptible power supply. This can be obtained with the refurbishment of the gas turbines power plant embedded in the petrochemical complex. This job has been identified and advised by Bechtel to CPA Baghdad for the contract award, our team is contact with CPA Baghdad to try to expedite the order award and the beginning of the works. 2. 120 million cubic feet of gas per day to produce five tons of chlorine per day and four hundred tons of high and low density polyethylene per month. The Gas liquefaction plant is located in GRID QU 631 531, three kilometers south of the petrochemical plant. Our team spoke with IFEST and CPA Baghdad to coordinate with TF RIO to restart the gas supply. (b)(6) CPA South Industrial Development Paper Factory Missan The plant, located 20 km south of Al Amarah, grid QA 09 02, was installed and commissioned in the 1979 by the German company WOITH SULZER, the equipment was of first quality, boilers from LURGI, controls and steam turbine from SIEMENS, instrumentation from ICAR. The plant can produce pulp from recycled paper and from imported pulp, the percentage of new or recycled material depend by the type and quality of final product. There are two paper mill, one to produce bags for packing cement and the other to produce cartoon sheets for packaging boxes, the rated production is 350 tons a day. The plant employ 940 workers, 25 engineers, and 100 security guards. Status The paper mills and the pulp plant are in good condition and the management has in mind to restart the production of cartoon sheets for packaging boxes, the production rate calculated will be 25 tons per day, that means 7% of the rated production. The production capacity will be so low at the beginning due to serious problems at the water treatment plant and in the pulp plant, some filters has to be substituted and the original vertical motors have to be reinstalled to give at the plant the original performance. The plant is equipped with a steam gas turbine of 10Mw complete with a steam recycling system, but the heat exchangers they are not any more working due to the corrosion caused by the bed filtering of contaminated water from the pulp plant. However the turbine should be putted operational using the existing boilers without recirculation. Actions Investigate and gets more details on the two lists of spare parts and consumables supplied by the management, the two documents are listing the equipment needed to restart the production of the plant as indicated above and to restart the steam turbine operation with a great advantage for the grid and Missan population. Another survey will be paid by our team together with the Utilities team and Bechtel. The final lists of spares will be processed by CPA South for approval. (b)(6) - - CPA South Industrial Development Cement Factory Um Kuasr To be visited before Christmas Fertilizer plant The plant was designed, installed and commissioned by Mitsubishi Heavy Industries in the 1979, is composed by two parallel lines for the production of 500,000 tons per year of ammonia and urea for each line. The services, water treatment plant and cooling towers are very old design and unable to reach the water quality and purity required, the open system technology is consuming a big quantity of chemicals, and the quality of them is poor, this is effecting the production in terms of wearing of the equipment and quality. Status the plant was not looted and can restart the production. The equipment is generally heavily worn and far out of the minimum safety margins, the maintenance and management is poor and need to be updated with modern and effective procedures. The plant is a continuous process and need a preparation time to carry the equipment at the rated values to start the chemical processes, this require a process starting up of 20 days minimum, it is enough to loose the power supply for more than three seconds to shut down completely the plant and restart from the beginning the procedure. In these last three months the technical teams failed three times to start up the process due to electricity black out from the grid. There are two incoming lines in the main substation, one is coming from Kor Az Zubayr PP substation in operation and the other from Umm Quas substation down. 50 Mio feet/day of natural gas is needed to withstand the production rate, the gas should be available from the South Oil Distribution Company, gas receiving and reducing station is ready to operate. Actions Verify the possibility to place a 15 Mw mobile generating set to start and maintain the production. TF RIE, Bechtel and Mott Mc Donald to be involved. A request for detail the spare parts and the chemicals has been made to the management to assist the production till the end June. Actions with Mitsubishi will be undertaken to try to recover some important and quite expensive equipment stored in Japan for maintenance. (b) (6) CPA South Industrial Development Paper mill Bashra To be visited before Christmas B Magit engineering and steel structure fabrication company Engineering company serving all the South part of Iraq before the war, capable to design end manufacture full customized fabricated steel equipment like filter, heat exchangers, vessels, tanks, bridges, piping, stacks, little ships. It is composed by 100 engineers, of which 16 are design engineers plus the workers for assembling and manufacturing. The company was reporting to the Army and was led by a General Officer. The company is composed by several assembling sheds equipped with overhead cranes. Status The company was completely looted after the war and little is left in term of equipment in the assembling facilities. Also the offices was looted, and all the software and the documentation, drawings, calculations, manuals were lost. Actions Put them again in operation supplying the necessary material to restart the assembling in one of the sheds and use them as advisors for assessing and analyzing some part of the plants we are inspecting. Right now a data sheet for motors identification has been delivered to them to identify more precisely their needs in terms of equipment to be supplied and their capacity to understand the modern technical standards. (b) (6) Econ Hom AIRBORNE FACTORY STATUS Factories & Companies # Operatio % City Grid Owner Factory Current # Projects Notes nal Pre- Opera Employ Initiated war? ees tional Employee Gvt Lack of raw material Abu Ghuryb 200 ? ? Baby Milk ? Lack of raw millk ? 50% ? 700 Gvt Abu Ghuryb Dairy Production halted since RR Bridge that links mine w/SPP was destroyed. RR Bridge is being Phosphate ? Gvt Akashot 3210 0% repaired - expected completion Mine date on/about 1Jan04. Mine needs explosives in order to increase excavation. Carpet 82 Gvt 0 Al Fallujah 0% Company Y Gvt 0 0% 47 Asphalt Al Fallujah Not enough seed from BGD Flour Mill 40 Prv Al Fallujah 40 • 50% Received 2x860KVA generator - Brick Factory needs 1,025amp transformer - will Pvt 1500 45% 740 Al Fallujah Y employ remaining 760 workers. (Refractory) Needs more security Cement Needs 11MW of pwr; only has 431 50% Y Gvt 590 LB93179264 Al Fallujah 2MW Factory Plant Needs contractor to provide 56 Al Fallujah 143 10% ? Pvt Tile Factory cement; power is okay Econ Hom AIRBORNE FACTORY STATUS Factories & Companies # Owner Factory City Grid % Operatio Current # Projects Opera Notes nal Pre- Employ Employee Initiated tional war? ees Cotton Mill Al Fallujah Gvt 85 N Northern Oil Al Fallujah Gvt 12k Const & Con Al Fallujah Gvt 3329 Y 3329 13 jobs/year Const Material Al Fallujah 124 N Gvt Livestock Y Al Fallujah 40 Gvt Slaughter Hs Akashat Akashat Phosphate Pvt Y 234 Mine Econ Homel AIRBORNE FACTORY STATUS Factories & Companies Current Factory Grid Owner # City % Operation # Projects Notes al Pre- Operat Employe Initiated Employ es ional war? ees Only needs opportunities to bid Asphalt Al Qaim Pvt 40 100% 40 on contracts. Factory Requires cement. Previously purchased at $7.50 per ton now Brick ? Al Qaim costs $75 per ton. Still paying Pvt ? Factory employees - specially trained on German Equip. Cement Al Qaim ? 462 Gvt Y 600 Needs 25 MW of power. Factory Cement Al Qaim - Gvt 676 676 Anbar Branch Factory 2.5 MW generator rec'd from CPA. Had to be sent to Super Al Qaim Gvt 0% Y at 20% FU 006009 3,210 33-09o compt mania pre-Needs Phosphate 3,210 raw materials (Urea, nat gas & Factory batch process) Ribbon cutting Econ Home FACTORY STATUS Factories & Companies Curren Factory Grid Owner City Operation t# Projects Notes al Pre- Operation Employ Initiated Emplo ees war? yees Hamorabi An' ah 30 Asphalt Plant Textile Factory - Not Operating-no access to An' ah 0% Gvt 114 114 carpet quality material. Not operating - no access to Textile Factory - An' ah Gvt Y 0 120 70-100% clothes quality material. Ar Pvt Flour Mill Ramadi Needs 750KVA to replace a Ar ? ? Y ? Pvt generator currently borrowed Asphalt Ramadi from Fallujah Asphalt Plant. Al Shaheed Gen Ar 4MW for start up & Min.ops.; ? ? ? 1279 Co/Copper Ramadi 14MW to be 100%. Factory AIRBORN FACTORY STATUS Factories & Companies Factory Grid Owner City # Current # % Operatio Notes nal Pre- Employe Projects Initiated Employe Operatio es es nal war? Beef Slaughter Ar Ramadi Pvt 150? 300 50% House Chicken Production Ar Ramadi Pvt ? ? ? 0% Factory Diyala Canning - ? ? ? Ar Ramadi Pvt 1300 Muqadadiyah Diyala Canning - ? Pvt ? ? Ar Ramadi 1200 Baqubah Diyala Canning Ar Ramadi Pvt ? ? ? ? Factory Fish & Chiken Ar Ramadi P/Gvt 718 100% 718 Y Production Needs steady power and LPG gas. ? Ar Ramadi ?% 1200 Receiving 25% of 0 Glass Factory 1 1.5ML of diesel needed per month ? ? ? Ar Ramadi Glass Factory 2 ? ?% Pvt Ar Ramadi Muqadadiyah ? ?% 180 Ar Ramadi Pvt 800 Y Tomato Paste Co 60% 480? BITERBORN EDI - Econ Home AIRBORNE FACTORY STATUS Factories & Companies Grid Current # City Factory Owner Operational Notes Projects Initiated Employe Operatio Employe Pre-war? nal Babad Diyala Tomato Paste Habbaniyah Pvt ? 80 250 Factory Bayji Fertlizer Gvt Habbaniyah ? 0 Plant 1,300 Corn Processing 0 Gvt Y Habbaniyah 32-45 plant Dour Sala Ad Din Gvt ? Habbaniyah Gen Eng Co 2,843 T. Al Sura Co Pvt Habbaniyah 100 Y 200 200 (dry wall) T.Abu-Laith Co Pvt Habbaniyah 100 Y 200 200 (debris removal) Tabacco ? Gvt ? Habbaniyah ? ? Chicken Process Pvt Habbaniyah ? N 150 Samara Y Y Gvt Habbaniyah 2500 ? Pharmacueticals Econ Homel AIRBORNE FACTORY STATUS Empl. Home Factories & Companies # % Current # Factory Grid Operatio Owner City Notes Projects Initiated nal Pre- Employe Operatio Employe es es war? nal Samara Gravel 7 Y 7 Habbaniyah /Sand/Chemical Y 120 Pvt Tikrit Dairy 120 Habbaniyah 6053 Bayji Refining Co Y 6053 Habbaniyah Y Balad Soft Drink Y 36 36 Habbaniyah 25 Y Y 25 Balad Flour Mill Habbaniyah Habbaniyah Habbaniyah Habbaniyah Econ Home AIRBORNE FACTORY STATUS Empi. Home Factories & Companies % Current Grid # Owner City Operation Factory Projects Oper # al Pre- Notes Employ ation Initiated Employ ees war? al ees Haditha ? ? Refinery ? ? ? Haditha MA319678 Tire Factory Y ? ? ? ? Very large fac.; no status Hit Same Owner as the 2 in Flour Mill Pvt ? ? ? ? Fallujan and 1 in Ramadi Agriculture ? Iskandriyah ? ? ? 3850 Factory ? Gvt Iskandriyah ? Ammo Factory 1276 1276 Employees being paid ? ? Iskandriyah ? Soap Factory ? ? Gvt Truck Factory Iskandriyah 2060 Employees@ half pay; no Iskandriyah Gvt Tractor Factory N 50% 4,000 4,000 market for tractors Kubaysah Gvt KC680200 Cement Factory Y 682 682 20% Needs 50 MW of power Nassir Wa Al Needs 2- 750 KVA Al Faris Co Salaam Generators. W/ pwr plant (Steel MB11478574 Gvt Y % 500 1300 (Outskirts of will be able to operate at Fabrication) Fallujah) full capacity Rutba Asphalt Rutba ? Gvt FS26955529 ? ? Plant SU TIKBORNE DEY Econ Home: AIRBORNE FACTORY STATUS Factories & Companies Grid Owner City Factory Current % # 750perati # Projects Notes onal Pre- Opera Employ Initiated Employ war? tional ees ees National Metal & 200 4080 5968 250 Gvt Mahmudiyah Bicycle Garment 75 300 Mahmudiyah Gvt 4081 6003 Factory East Cotton Pvt MB 3932 6397 Mahmudiyah Fact. Econ Homek AIRBORN FACTORY STATUS Factories & Companies Factory # Owner City % Grid Operation Projects curent Notes al Pre- Opera Employ Initiated Employ ees war? tional ees ? Haditha ? ? Refinery ? ? Haditha ? ? MA319678 ? Y ? Tire Factory Large factory; no status Hit Flour Mill Same Owner as the 2 in ? Pvt ? ? ? Fallujan and 1 in Ramadi Agriculture ? ? Iskandriyah ? ? ? Factory ? ? Ammo Factory Iskandriyah Gvt 1276 1276 Employees getting paid ? ? Soap Factory Iskandriyah ? ? ? Employees@ half pay; no Tractor Factory Iskandriyah Gvt 50% N 4,000 4,000 market for tractors Kubusah Cement Factory KC680200 Y Gvt 682 682 20% Needs 50 MW of power Nassir Wa Al Needs 2- 750 KVA Al Faris Co Salaam Generators. W/ power plant Gvt (Steel MB11478574 1300 500 % (Outskirts of will be able to operate at full Fabrication) Fallujah) capacity Rutba Asphalt Rutba FS26955529 Gvt ? ? ? Plant B2UE7CKBORNEDIK Please complete the folowing information for your Company. Reason why more amployets not packonnelee curkya Company nam equipmen 50% Good 2680 75% 100% No bonus to encourage the 50% 1 Hilla Textile Co. employees & inrease production yes effecteed by war 63% 2242 yes 2 Woolen Ind. 100% No yes Not good 3 Ur state Comp. Najaf Factory completely destroyed 3100 100% yes 4 R.M.C All good 100% 5 That AL-Sawari TATI 100% Not good 6 Paper Ind. All 100% 7 Zawraa Co. 80% 60% 6800 8 Cotton ind. 100% yes Main buiding is damaged yes 9 Engineering Institute Shortage in gas. yes yes 10 Construction Ind. Co. yes 80% yes Shortage in gas. Reasonable Non yes All 100% Non 11 Battery Co. The Company is distroyed and out 100% 12 17 Nissan 815 of order. bad No bonus to encourage the 100% 70% available 3255 available 13 Wasit Textiles. employees & inrease production No TAIl 100% No yes lyes 14 Sammara Drug Co. Reasonwhy.more employeesootback ontre.job..ur Corpany name: security equipmention back at work materials. spare burt Boarcasy All 15 Automible Company. 100% yes because of marketing problems. All 16 Ninawa Drug Comp. No Yes 100% yes Some damages 17 Hand Made No No Available Good Nothing. Carpet Company. 3758 18 Mechanical Ind. Co. yes available. Not available. Non 100% yes Ministry Of Industry & Minerals: State Owned Enterprises Damaged beyond repair Needs Assessment as of January 2004 Operational within thirty days Cap Employ Facility Actions Enterprise Location 0 Util vs Remarks ment Sector 2002 Electricity Remarks Remarks Items Status Grid Type Name Priority Looting Province Electricity Needs Cash Repairs from Needs Other Naturaul Gas Diesel Supply TAUgUSt MW Current supply Capacity Need Coalition Sector State Owned Raw materials Company for 2,090 <320MID or Tobbaco and Food 400Mcigarettes Cigarettes Tobacco Co 18,000 tons of ra 1,222 Al Faris Co material = 6 months Engineering Requires enhancement of raw State Co of Ready Made 3,229 material to increase > Z Textile Wears production. Also must solve tent production State Company for Materials - N 0% 260 1 Heavily damaged • 1st AD Construction Baghdad Production Construction industry Thermostone Brick Plant State Company for Materials N 0% Heavily damaged 1 - 150 Diala Construction Production Construction Industry Diala Brick Plant State lack of diesel Company for Operational 60K Materials 220 Need gr NIN e oil limiting - Y 25% bricks per day scatio Construction MNDCS production Production Construction Ad Diuaniyah Industry Babylon - Mahawel Mahawel Brick Plant 35Km NE of State Sammarra on the Buhayrat Company of Shar... Geological Needs orders - - cutenty supplying • 5% silica for glass plant 4th ID AJ Dora Survey & 1 MW/hr Verify Salhadin Production Construction Mining location on Sodium Sulfales large map Prepared tol (b)(6) 35° Ministry Of Industry & Minerals: State Owned Enterprises Damaged beyond repair Needs Assessment as of January 2004 Operational within thirty days Cap Employ Enterprise Facilty Needs Location Actions Q Util vs ment Remarks File # Sector 2002 Electricity Remarks Items Remarks Status City Grid Name Type Distra Priority Looting Province Electricity T AuguSt MW Needs Cash Needs Other Repairs from Capacity Need Current supply Diesel Supply Naturaul Gas Coalition Sector State Company of 9 35Km N of Geological Salt Operational Sammawah $ Y 50% -Or orceon depends Survey & Al Dora 1 MW/hr Samawa Production Construction Mining State Company for Geological Mosul Camp N 0% Mining Survey & Al Dora Construction Mining Started rehabilitation for operation in mid- Southern 17MW full Q Locations 35 km from October... and Need Grid econd line Samawah... sulphil Cement - 750% ip jan 04 = for one line - cement grinding at 25% Location... 34MW total resistant cement Company 40MW/Hг MNDCS 500 tons per day... Samawah w/ 10 MW Production A Muthama Construction As Samawah stocks 20,000 tons NV00505510 started Q at 1500 tons/ day Glass and Ceramics N/A Anbar Company Production A Ramadi Construction LB 3790 9888 Glass Company Near City Center... ® confluence of Reached 25tons/day Needs natural Started production of Glass and Euphrates fat glass. Also glass using deisel oil. Ceramics and Warai - gas also... 1,200 started 1 line of bottle 50% needs 5kCM Have 3MW from 82nd 3MW/Hr Company River... go production at 5 tons / A Ramadi Production LPG unreliable generators Construction south... plant day LC3839500419 Glass Company on right side lof road Needs natural Glass and Obtained 40 tons of gas also... 1,200 - Ceramics LPG and started • Needs PWC 82nd Y 20% needs 5kCM Anbar Company fumace A Ramadi Production LPG Construction LC3814198729 Cemaic Company Prepared fol (b)(6) 352 CA COM 2 Damaged beyond repair Ministry Of Industry & Minerals: State Owned Enterprises Needs Assessment as of January 2004 Operational within thirty days Cap Employ Needs Actions Facility Location Enterprise Remarks Q Util vs SC ment File # Sector Factory 2002 Electricity Items Status Remarks Remarks Grid Distr Type Name Priortty Looting Electricity Province August ww Needs Other Repairs from Needs Cash Naturaul Gas Diesel Supply Capacity Need Current suppty Coalition Sector State Company for Materials Y| 30% -Operational ~ Anbar 1st AD Construction Production 0.7MW/Hr Abu Ghraibe Construction MB22628540 Industry Abu-Ghraibe Concrete Plant Storage areas in Baquba (not utilized) State Owned Anu Graib, Bab Company for Muadam, New 50 Food Tobbaco and 1st AD Storage Baghdad, Near Cigarettes Tobacco Co Abu Ghurayb MB43129073 Rasheed camp, Kirkuk (not utilized) State Owned Company for • • Tobbaco and Food 1st AD Storage Cigaretles Abu Ghurayb MB43129073 Bab Al Muather State Owned Company for • Tobbaco and Food Anbar 1st AD Storage Cigarettes Abu Ghurayb MB51938624 Warehouse #11 Water Purification Al Faris Co 0% - -1 ~ Operational 435 Plant Anbar Production Engineering Abu Grahbe State 150km from - - - Substation and trai N 0% - peparing startup Company for bridoe - repairec Qaim Mines Anbar Mininig Phosphate Akashol Fertilizer/ Petrochemical Design and N. 0% Construction Anbar Service Design and N Construction Anbar Service 352 CA COM Prepared for /h\/A) Al Ramadi | AJ Quain Ministry Of Industry & Minerals: State Owned Enterprises Damaged beyond repair Needs Assessment as of January 2004 Operational within thirty days Employ Cap Enterprise Facility Location Needs SC Actions Remarks File # Q / Util vs ment Factory Sector 2002 Electricity Remarks Items Status Grid City Type Name Province Looting Needs Cash Natureul Gas Needs Other Repairs from Cap Current supply Coalition Sector Started production at Iragi Cement 1,000 tons per day. 60,000 ton of linker Y Company 25% Anber Expected monthly Al-Qaen 3rd ACR 20MW/Hr Cement Co Construction prodution 25K tons. State Co of In City.. Need Ready Made o operational Y 24% Wears Textle location... Production Anah Factory State Company for 82nd 84% Hand Made Anna Textile Anbar Carpets Production Started grinding of Iraqi Cement for white cement... white cement 300 500% Company Y 36% Anbar started 1 mill 300T/d Falluja 3rd ACR tons per day Construction LB9318593012 Haririat State Next to No Q in Nov Cement Company for 560 N started Q on 12.10.03 0% 82nd 3 due to power Anbar Falluja Refractories 1 2MW/hr cuts factory Construction Refractories L89313592404 1MW for start Heavy engineering another equipment Can get Obtained contract for up... 5 MW $660k and to 60% capacity in 60 - total • $2.4M for water 25% $1.4m days assuming 5 1MW/Hr treatment units Operating on pending MW. achieved 50 diesel tons of Q Iraqi Cement Requires 20 mw started klinker 800 - N 0% Anbar Company power for One line production 3rd ACR 35MW/Hг Kubaassa Cement Co Construction 30MW 403 tons of fertilizers State 15 mw electric. required at full sold..31,000 tons in 3,212 Company for 200= Awaiting 10M cubic ft stock. should start Anbar 82nd 0% Qaim Phosphate 300,000 tons 25MWPhr of gas. O after provision of GU005001 per year gas Fertilizer/ Petrochemical State Company for • 91% Hand Made Textile Rawa Anbar Carpets Production Prepared for (b)(6) 352 CA COM Damaged beyond repair Ministry Of Industry & Minerals: State Owned Enterprises Needs Assessment as of January 2004 Operational within thirty days Cap Employ Actions Remarks Q Util vs Location Facility Enterprise ment 2002 Sector Fle # Electricit Status Remarks Items Remarks Grid Priortty Looting Electricity Province Needs Cash Needs Other TAUgUST MW Repairs from Naturaul Gas Diesel Supply Current supply Capacity Need Coalition Sector State Company for 5 sites near N| 0% Needs orders Geological 145 city 82nd Rutba Anbar Mining Survey & Construction Mining State Company for - 54% Hand Made 4th ID Kirkuk Textile At Ta MiM Production Carpets Daily production 500 one of 2 lines tons... production 10 Km SE of Iraqi Cement operational Capacity y - 20% o 30,000 tons a problems = low KirkMDD SE Company 4th ID Kirkuk At Tamim 32MW/Hr month capaity utilization Cement Co Construction State Co for plant has ginning N 0% Cotton done in Baghdad Kirkuk Textile 4th ID Industries At Tamim Ginning Plant Cotton Industries State Owned Compary for Food Tobbaco and BaD AT 1$t AD storage Tobacco Muather Cigarettes Baghded,. Center of Hilla towards Has 2MW/hr State south on road Started recently due Isales @ 150MID/ presently 5 Company for - Y 37% 2,642 to Najaf and month Textile to power supply MW design Babi Textile Diawinah...N Al Hilla 5MW/Hr MNDCS capacity Production Industries eed grid MA4850836873 location... Hilla Textile Company State 25 Km SE of provision of Company for 2MW diesel Lack of electricity Baghdad...Ne - 2 […اقتُطع العرض هنا — النص الكامل في ملف التنزيل]