BAGHDAD: The Dora refinery on the edge of Baghdad has been ravaged by rust. The crude distillation units are 60 years old. Damage from US bombing in the 1991 Gulf War is still evident, and mortar rounds land almost daily.

American engineers helping draw up plans to rebuild the refinery say it is a miracle the complex functions at all, let alone processes 110,000 barrels per day. The operation is run by Dathar al-Khashab, a silver-haired engineer in his 50s who comes to work early every morning, puts on a blue overhaul and hustles between the plant and his office.

Khashab speaks on three telephones at once to ensure crude is reaching the refinery and product is being distributed. "We cannot let production suffocate," he shouts across primitive telephone connections to officials running storage tanks in the south. "To hell with road security. We no longer have place for our excess fuel oil."

Amid Iraq's rusty refineries, sabotage and fuel shortages, there is a new breed of savvy bankers, hands-on oil managers and western-educated engineers who believe oil can help build a dynamic, modern nation which will inspire the Middle East.

Their task is formidable. Iraq has the world's second largest oil reserves after Saudi Arabia. Saddam Hussein bought loyalty with his oil money, creating a strong dependency culture in which a generation of Iraqis grew up expecting the state to find them jobs.

Khashab is among thousands of engineers and technicians who kept the oil system working throughout three wars and 13 years of economic sanctions, only to see the proceeds wasted on Saddam's armies, palaces, monuments and bribes.

Khashab was among the last generation of Iraqis who grew up in an era when the country had a first-rate education system and Baghdad University attracted students from across the Middle East. Freedom, though not absolute, was taken for granted.

"There was a feeling of tolerance and integrity of government," said Khashab, who later obtained a masters degree in Britain and stayed out of politics. Iraq's new government is starting to deal with the costly legacy of Saddam and economic sanctions.

A council of development experts has been formed to marshal oil proceeds and international aide to gradually abandon subsidies, raise education standards and give the population the means and freedom to emerge from poverty.

Half of the budget still goes on subsides and the rest on government salaries and security. Oil accounts for 75 per cent of gross domestic product and 93 per cent of government revenue.

RENTIER ECONOMY: Analysts say the rentier economy is a Middle Eastern, not just an Iraqi, phenomenon. It breeds dependency, stifles initiative and negates democracy, they say.

The formula is simple, says Brad Bourland of the Riyadh-based Samba Financial Group - countries rich with oil export it and use the proceeds to finance the state and the ruling elite. There is no need to tax the population or let them be represented.

The results include a weak private sector and an education system that does not generally produce qualified graduates. The formula does not work in countries such as Algeria, Iran, Iraq, or Nigeria because the population is large. -Reuters