2009 Review: Baghdad back in business

24 December 2009

International firms are seeking opportunities in Iraq as security improves and the GCC projects market slows.

Baghdad and Washington have sought to declare Iraq open for business ever since the fall of the Saddam Hussein regime in 2003. But as the violence across the country reached its height between 2005 and 2007, their claims sounded increasingly empty.

The enormous potential of the Iraqi market has never been in doubt, but for international companies, gaining access has proved difficult. The lack of security has been compounded by political stagnation and divisions.

Companies that did send exploratory teams to the country found that little work of substance could be achieved and their investment was far from secure. Many of those who staked early claims in the market departed embittered and underpaid.

Now, with the previously booming GCC projects market grinding to a halt, the lure of Iraq is stronger than ever. It has become more attractive because of the improvement in security that began in 2007 and has since accelerated. “After 2003, we had no structure,” says Basim Anton, a board member at the private sector Iraqi Federation of Industry. “Companies that came here did not know who to speak to. But the business environment today is better than it was even two years ago.”

An important part of this improvement is the increasing political stability as the government of Prime Minister Nouri al-Maliki asserts its authority. This has supported the steady increase in economic activity, and many major projects are now coming on stream. Iraq is far from safe, but for prospective investors, the balance between risk and reward has tipped decisively towards the latter.

Securing contracts

Among the schemes now moving ahead, a design is being finalised for the construction of a $20bn gated community on the site of the Rasheed military base in southeast Baghdad, with a consortium of international companies poised to sign contracts.

This year, Lebanese contractors Khatib & Alami and Mebex Consultants will complete work on Baghdad’s first masterplan for 40 years, setting out recommendations for construction across the capital through to 2030.

International access to the market has been helped by the establishment of the National Investment Commission (NIC), with an outlet in every province. Its role is to support companies looking to invest in Iraq and introduce them to the right authorities.

The NIC is taking over from the Task Force to Improve Business & Stability Operations, which was set up in 2006. Led by the US Defense Department, the taskforce acted as an intermediary between the Iraqi government and potential investors.

“Viewed from the outside, Iraq looks pretty daunting and many companies do not know where to begin,” says one taskforce official. “Even getting flights and visas can appear difficult. Our role, which is being taken on by the NIC, is to make setting up a business in Iraq as simple as possible, and then to introduce companies to the authorities.”

“Once on the ground, companies can seek work in two ways,” says Michael Wareing, head of the Basra Development Commission. “They can either seek active tenders by government ministries and provincial councils, by meeting officials and talking through projects. Or larger companies can go out and study the possibilities in their sector and then approach the government themselves with their own proposal for a project.”

Foreign companies also need to consider whether to partner with a local firm or compete independently. Many Iraqi companies working with international groups still consider it prudent not to advertise the fact.

“Two years ago, if it was discovered you were working with foreigners you would be targeted [by militants],” says one Iraqi whose company is involved in joint ventures across the country. “Things are much better today, but it is still sensible to just keep your head down and do the work.”

International companies that have demonstrated a commitment to the country are likely to be in a better position to secure contracts. A deal signed in September 2008 by the UK/Dutch Shell Group to capture flared gas in the southern oil fields was proposed by the oil major after years of offering advice to the Oil Ministry for free. “The contract was subject to a tender, but Shell’s long presence in the country put it in a prime position,” says Wareing. “The government has been receptive to this sort of initiative.”

Despite its eagerness to attract foreign investment, the government needs to strike a delicate balance. The US’ motivation for invading the country in 2003 has been the subject of debate ever since. Iraq’s oil and gas reserves were widely viewed as Washington’s true objective, and there has been widespread suspicion that US companies would divide the lucrative post-war spoils among themselves.

Deals such as Iraqi Airways $5.5bn order for 50 new planes from the US’ Boeing and Canadian manufacturer Bombardier in March 2008 do little to allay such suspicions. Habib Fekih, Middle East president at Europe’s Airbus, says his firm “didn’t even receive a phone call” to say Iraq was interested in new planes.

At Umm Qasr port, the US’ Cornell Group was selected by the Transport Ministry in December 2008 to oversee the redevelopment of Iraq’s only deep-sea marine gateway.

“A lot of companies had been talking to the government and the port authorities about work at Umm Qasr, and this appointment was certainly a surprise,” says a senior official at one rival marine consultant.

However, Cornell’s contract has still not been formally signed, amid talk that some officials in Baghdad are resisting the appointment.

Foreign influence in the development of Iraq’s national resources remains a thorny subject for the government. While the number of local companies able to carry out large projects is limited, ministers face accusations of being foreign stooges if they continually hand contracts to international groups.

“Al-Maliki has shown independence,” says Wareing. “Certainly US companies do not just breeze in and win work automatically, although the fact that the government tries to do the right thing does not always mean the right thing happens.”

The influx of potential investors is testing the government’s resources. In one ultimately successful tendering process, contracts were awarded early this year to build 10 new hospitals worth $1.5bn in total. The winning contractors came from Australia, Germany and Turkey, the range of nationalities offering a good example of Iraq’s newly open market.

However, the bidding process had been delayed after the government discovered that some bids included fake companies and others did not stand up to closer scrutiny. The brain-drain from Iraq that began in the 1970s, and which has accelerated since 2003, has stripped the country of expertise, making it hard to scrutinise prospective investors. Luring Iraqi talent back to plug such gaps is as important for the future of the country as attracting foreign businesses.

With the establishment of the NIC, local government is increasingly taking responsibility for tendering contracts. Some 50 per cent of the national budget is now passed to governorates, which assess their own project requirements.

Greater security

This decentralisation highlights the sectarian fissures in Iraqi society. In the north of the country, for example, the Kurdistan Regional Government has been signing contracts with foreign firms for years. Baghdad claims that many of these contracts are unconstitutional, particularly those covering hydrocarbons, deepening a rift over control of Iraq’s oil reserves.

With greater money and influence devolved to provincial government, questions remain over whether local markets will split along sectarian lines. Josef Abbosh, the Iraqi chairman and chief executive officer of Mebex Consultants, which is currently working on the Baghdad masterplan, thinks not.

“A good Saudi company, for example, will have as good a chance as any to win work in areas with Iranian influence,” he says.

“Equally, you will soon see good Iranian companies working in Sunni areas. We are steadily breaking through these divides. The main priority is to get the work done well.”

The Iraqi market remains fraught. Amendments are still under discussion in parliament to tighten up the country’s Investment Law, giving foreign companies greater security over their investments, and the government must continue to prove it can stamp out violence.

Despite progress in reviving its oil industry, questions remain over the state’s ability to pay for all the projects needed at once. But entering the market is now simpler and the risks, while still high, have become acceptable to many companies, given the potential profits. “Iraqi infrastructure has been suffering from underinvestment since the 1980s, and since 2003 things have been worse,” says Abbosh. “But there are opportunities across the country in every sector. In two or three years, the Iraqi market will outpace the Gulf. The potential is huge.”

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