Iraq Projects: The race to restore economic prosperity

05 March 2012

After years of conflict, Baghdad could see investors queuing up for work if it can promise them stability and security

With massive oil and gas reserves, Iraq has the potential to reclaim its historical position as one of the most prosperous economies in the Middle East. Three decades of conflict, crippling sanctions and, most recently, foreign occupation, have conspired to make it one of the poorest. Its per capita gross domestic product (GDP) of $2,531 in 2010 was the second lowest in the Middle East.

Nine years on from the US-led invasion that ended Saddam Hussein’s 24-year rule, Iraq needs to rebuild, a process that should provide massive opportunities for investors and contractors. But development plans are being hampered by concerns over security, corruption and bureaucracy.

Distribution of budget, 2010-14
Construction, building and services17
Kurdistan region17
Province development12.5
Transportation and communications9
Source: National development plan

The Iraqi government put together a comprehensive reconstruction programme in its National Development Plan (NDP), which calls for $186bn-worth of investment between 2010 and 2014. As well as repairing damaged infrastructure and increasing industrial productivity, the NDP has set targets to diversify the country’s economy, raise GDP by 9.38 per cent a year, and generate 3-4.5 million new jobs. It also aims to reduce poverty by 30 per cent from 2007 levels and distribute production across the country, including to areas neglected by Saddam’s regime.

The Oil Ministry estimates Iraq’s reserves of crude to be 143 billion barrels. This figure would place the country second only to Saudi Arabia in terms of total oil reserves. UK oil company BP estimates reserves at a more conservative 115 billion barrels, which would rank Iraq third in the world, behind Iran.

Iraq’s oil dependency

Oil production accounts for more than half of Iraq’s GDP, which means the country’s fiscal security hinges largely on global oil prices. According to government and Central Bank estimates, oil exports could generate between ID90,000bn ($77bn) and IR118,000bn a year by 2014, depending on output and global prices. Even now, with dilapidated and inefficient drilling facilities, Iraq is a top-10 producer, extracting 2.7 million barrels a day of crude oil. It also has gas reserves of 3.2 trillion cubic metres.

The NDP prioritises investment in oil, electricity, agriculture, transport and communication. Oil and electricity, which are allocated 15 per cent and 10 per cent of the NDP’s budget respectively, are a focus to help rebuild infrastructure; agriculture, which is allocated 5 per cent, can help diversify the economy and offer food security; and transport and communications tie in to other parts of the economy.

The NDP also wants to address vulnerable groups in society such as women, the young and the 23 per cent of the population living below the poverty line. Estimates put the housing shortfall at 3.5 million units. This will become more acute as youngsters begin to leave home.

Deterrent factors

The goals of the NDP will be funded with $100bn of government money and $86bn of private and foreign investment. This can be hard to attract, however. There may be huge gains to be made, but the difficulty of doing business in Iraq often turns investors away. The combination of violence, corruption and bureaucracy makes contractors think twice.

Attacks on civilians, 2003-11
Source: Iraq Body Count

Iraqi politics is fraught with tension at present, with factional infighting hindering the country’s progress. Public frustration leads to violence that can further undermine political and social stability.

In 2011, according to UK-based security firm AKE, 1,716 explosive attacks took place in Iraq, of which 78 were suicide bombings. Baghdad suffered the most between October and December, with two to three attacks a day, accounting for 38 per cent of violence reported during this period. Mosul, Kirkuk, Anbar, Babil, Diyala and Salahadin, were also focal points for violent disturbance.

Civilians killed in violent attacks 2003-11
Source: Iraqi Body Count

The autonomous northern region of Iraqi Kurdistan has remained mostly immune from unrest, even during the worst periods of violence. According to AKE, Mutharina and Najaf reported no acts of mass violence in the fourth quarter of 2011, and Basra and Maysan also remained relatively safe.

Even though violence is levelling out, Iraq remains one of the most dangerous countries in the world in which to do business, and even relatively routine visits require stringent security planning. Projects must be guarded around the clock, which adds cost as well as anxiety. Hussein Damirji, an Iraqi lawyer with US law firm Patton Boggs, estimates that security measures add 20-25 per cent to a company’s budget in central Iraq.

Corruption is rampant. Germany-based Transparency International ranked Iraq 175th out of 183 countries in its annual corruption perceptions index in 2011. Even the NDP concedes that challenges face the country. “Financial and administrative corruption are among the most important challenges to good governance in Iraq,” it says.

Damirji says corruption is one of the biggest deterrents to companies wanting to enter the market; often more so than security. However, it is still possible to do business legitimately and Damirji’s clients do not pay bribes. “Any consultant, or anybody I use has to sign a document stating that,” he says. “I will not allow it, I don’t accept it and you don’t need to [pay bribes] in order to register a company. It will take longer, but you can do things.”

Problematic bureaucracy in Iraq

Paperwork is another burden, with layers of legislation passed by successive governments. But Damirji argues this can be overstated. “The old Baathist bureaucracy is still in place because people have had 35 years of that kind of bureaucracy, where everything had to be stamped,” he says. “You can’t change that system overnight, but they’ve tried to make the laws much simpler and more conducive to allowing people to invest in Iraq. If you look at incorporating a company in Iraq, the laws were simplified in many ways.”

This report looks at areas of opportunity in oil and gas, electricity, housing and transport, and examines Kurdistan’s relationship with other provinces.

With a population of 30 million, untapped hydrocarbon wealth and a desperate need to rebuild, Iraq should be a land of opportunity. But the question every contractor must ask is whether it is worth the effort to break into the market. “With high risks there are high rewards,” says Damirji. “But you need to mitigate those risks.” Contractors must do this through investing time and money in research, paperwork and security. For those who make the effort, the rewards could be huge.

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