When the Iraqi government unveiled its business-oriented foreign investment regulations in October 2006, few overseas companies were ready to take up the challenge of investing in a country that was in the middle of a sectarian war.

But the prospect of a flood of investment into Iraq’s economy no longer seems so fanciful. Blue-chip companies are starting to line up behind centrepiece industrial projects. Arcelor-Mittal, the world’s largest steel company, is bidding for one of the latest, an estimated $500m project to rehabilitate a major steel plant in Basra.

Ministers say the change in mood is palpable. “Last year, we were having to drag companies in to look at the opportunities,” says Industry & Mines Minister Fawzi Hariri. “Now they are queuing up voluntarily.”

Increasing investment

A new bilateral investment treaty signed with Germany in late July is just one indication of a wider improvement in Iraq’s investment prospects. Despite reservations about the security situation, German’s Economy Minister Michael Glos says German companies are expected to be active investors in Iraq. “The time of the middle men is over,” he says.

Growing consumer confidence is improving the investment environment. Economic fundamentals have improved, with inflation decreasing towards the 13 per cent mark, from a peak of 60 per cent in 2007. The dinar is strengthening and could hit the ID1,000-to-$1 mark in 2008, from ID4,000 four years ago, says Hariri.

While media attention has focused on dalliances between international oil companies and the authorities in Baghdad and Irbil, the government is equally focused on attracting investment into other basic industries: petrochemicals, fertilisers, minerals and mining, iron and steel, and cement.

“Iraq is serious about becoming a regional economic powerhouse,” says Hariri, who points out that Arab states are starting to take a serious look at investment.

The UAE, the first Gulf state to establish an embassy in Iraq, has promised to invest a minimum of $100bn.

The Iraqi government’s efforts to erect a legislative framework supportive of foreign investment are proving successful. If the security situation is less than favourable, the overall regulatory apparatus appears as good as any in the region, and in the case of the Kurdish provinces, the most business-friendly of all.

Iraq’s Council of Representatives (parliament) passed a major new investment law in October 2006, although the implementing regulations have still to be published in the official gazette. Once properly in force, the law will allow for 100 per cent foreign ownership and management of Iraqi companies, barring the oil, gas, finance and insurance sectors. It also establishes the freedom to transfer abroad all funds associated with investments.

However, unlike the Kurdish Regional Government (KRG) area, foreign investors cannot own land, instead having to rent or lease it for up to 50 years.

Streamlining legislation

A network of Iraqi government officials dealing with investment policies and transparency in procurement has been established, and steps are being taken to harmonise previous pieces of legislation into a coherent whole, in advance of the Investment Law hitting the statute book.

The National Investment Commission (NIC), headed by Ahmed Ridha, has been set up to act as a one-stop shop for foreign investors. The NIC, which became operational in December 2007, is intended to give clarity to foreigners dealing with the various investment authorities, whether regional or national.

The government is also considering setting up joint free zones along its borders with Jordan, Syria, Turkey and Iran.

Baghdad continues to lag behind the KRG, which set the pace with its early introduction of a classic Singapore-style open investment climate. But Hariri, a Kurd himself, argues that Kurdistan’s hallowed stability provides a useful launch pad for investors to target non-Kurdish areas. He says northern business ventures are already penetrating Baghdad and other Arab areas, while non-Kurdish Iraqi investors exploit the KRG’s security-haven status as a venue for deal-making.

Although Iraq does not yet have a privat-isation law, the Industry & Mines Ministry has focused on joint venture and production-sharing agreements to attract foreign investment to more than 200 state-owned enterprises (SOEs). The plan is to use these partnerships to modernise key industries over the next four years. The joint ventures will permit investors to acquire production output from Iraq’s factories in exchange for foreign partners’ expertise and capital.

The Iraqi authorities have adopted a pragmatic approach to shoehorning investment into its state-owned assets. “The ministry is using existing laws to open the SOEs to foreign investment,” says George Adair, a Baghdad-based adviser on a joint Middle East & North Africa/ Organisation for Economic Co-operation & Development project.

“What this does is allow investors to come in and experience for themselves what it is like to invest in Iraq, while the investment framework is being fleshed out.”

Incentives are part of the package. Companies taking up the early ventures will have the right of first refusal on eventual privatisation. Security concerns are also being addressed. Ridha says the Defence Ministry has pledged to protect any project that is granted an investment licence.

The early fruits of the investment drive are relatively scant. By July this year, the NIC had issued licences worth only $418m. Just two cement-sector SOEs have to date opened up to foreign companies, through two public-private partnerships: Kirkuk Cement Company and Al-Qaim Cement, based near the Syrian border. The latter project is to be operated by a joint Iraqi-Romanian consortium comprising the local Al-Jawhara al-Khalijiyah and its foreign partner Uzen.

The local Al-Sharq al-Awsat is meanwhile partnering in a German-backed consortium to overhaul the Kirkuk cement plant.

More tie-ups are planned. The ministry set a 31 July bidding deadline for foreign companies looking to overhaul six further cement plants and a large petrochemicals facility in Basra, besides iron and steel plants, and several chemicals, pharmaceuticals and textiles facilities.

Hariri is prioritising sectors that are most closely linked to the economy’s growth areas. Cement is a prime candidate, considering the strong demand from the country’s vibrant construction sector.

Petrochemicals is another. Iraq is seeking investors to participate in the upgrade of a petrochemicals plant in Basra, which would modernise the existing 500,000-tonne-a-year olefins complex in the southern port city. It has also revealed plans for a greenfield petrochemicals complex at Musayyib. However, progress in the petrochemicals sector is slow, acknowledges Hariri.

“We are asking for a minimum $200m investment in petrochemicals but really they should be looking to invest $1bn,” he says. “Investors would be sitting on the raw materials.”

Strong interest

Investor interest in the SOEs is strongest in iron and steel, as shown by ArcelorMittal’s appetite for the Basra plant rehabilitation, as well as engineering and cement.

Having listed the dozens of SOEs to be offered up to partnership agreements, the ministry is looking to continue with a raft of new deals. In May, it announced a further expansion of the SOEs eligible for foreign partnerships, including engineering, cement, construction, petrochemicals, food processing, project management, services and manufacturing firms.

Baghdad is also looking to copy the Gulf’s grand projects programme and promote major industrial schemes in specific areas.

The Industry & Mines Ministry is driving an ambitious scheme to develop the untapped mineral deposits of the western desert in Anbar province. This was formerly an insurgent stronghold, but is now largely quiet after the success of the Sunni tribal Awakening groups in combating the Jihadist threat (see box left).

Semi-politically inspired schemes may take longer to be implemented than the more straightforward ventures that latch onto the economy’s immediate requirements.

Nevertheless, overall progress is sufficiently encouraging to allow the authorities to think about Iraq’s potential to remake itself as a regional industrial powerhouse. The possible entry of the Mittals of the world into Iraq is just the encouragement that the country’s frayed industrial landscape needs.

TABLE: Iraqi economic indicators

2006 2007e 2008f 2009f 2010f
Real GDP growth (% change) 6.2 1.3 7.1 7.5 10.4
Revenues ($bn) 41.8 41.0 46.9 59.3 68.9
Expenditure ($bn) 42.1 41.9 54.3 62.1 69.1
Exports ($bn) 28.4 34.1 36.3 48.3 54.3
Imports ($bn) 20.6 26.4 34.6 37.9 41.0
Current account (% of GDP) 9.3 2 -3.2 5 6
External debt stock ($bn) 98 101 49 51 52
Consumer price inflation (% change at end of period) 65 25 12 7 5

GDP=gross domestic product; e=estimate; f=forecast

Source: IMF

TABLE: Provincial capital budget expenditure, 2008

Province Allocated ($m) Spent ($m) %
Anbar 192 na na
Babylon 206 5.1 0
Baghdad 885 14.5 2
Basra 322 0 0
Diyala 168 na na
Kerbala 170 0 0
Missan 124 17.4 14
Muthanna 87 na na
Najaf 150 18.7 12
Ninewa 2,528 266 11
Qadissiya 137 0 0
Salah al-Din 150 16.1 11
Tameem 359 0 0
Thi-Qar 219 0.1 0
Wassit 137 0.3 0.2

Note: Figures are for six months to 30 June 2008
na=not available

Source: Special Inspector General for Iraq Reconstruction