Prioritising investment for Iraq

17 August 2010

Despite announcing grand plans to overhaul Iraq’s transport infrastructure, a lack of investment and proper planning means most schemes still remain on the drawing board 

In numbers

$1.2bn: Compensation Kuwait Airways Corporation is pursuing from Iraq Airways Company

$60bn: Value of investments Baghdad plans to make in rail infrastructure

Source: MEED

Most Iraqi ministries have had to take a backseat to the oil sector during 2010. With parliamentary elections in March and several international oil companies (IOCs) now under contract, Baghdad has been distracted for much of the year. The interim government’s focus has been squarely on helping the oil companies get to work.

The interim government’s focus has been squarely on helping the oil companies get to work

The Transport Ministry has been no exception. Although the sector is acknowledged as a crucial driver for economic growth in the longer term, it is understandable that boosting oil revenues has been prioritised in the short term.

Lack of leadership in Iraq Transport Ministry

The Transport Ministry has not been helped by a lack of leadership at the top. After months of mounting internal tensions, Amer Abduljabbar, Transport Minister since August 2008, was forced out by Prime Minister Nouri al-Maliki during the summer.

In a statement issued in July, Abduljabbar described his dismissal as “an unjust decision that was carried out against me because I fought corruption within the ministry”.

In particular, he alleged a conflict of interest between the ministry and the government regarding the decision to dissolve Iraq’s national airline, Iraqi Airways Company (IAC).

The government’s official spokesman Ali al-Dabbagh responded, accusing Abduljabbar of poor administration of the ministry.

Both the ministry – now under temporary stewardship until the new administration takes shape – and the government have declined to comment on Abduljabbar’s departure. However, one senior government source in Baghdad acknowledged the former minister’s anti-corruption drive had left him vulnerable. Despite efforts in some quarters to clean up Iraqi politics, a certain way of doing business persists.

“A lot of people didn’t like the way he ran the ministry. I think he was strict on corruption. Unfortunately, some people didn’t like that,” he says.

Despite Abduljabbar’s intervention, the decision to liquidate IAC is going ahead. At the heart of this is the airline’s seemingly interminable dispute with Kuwait Airways Corporation (KAC). 

Kuwait’s flagship carrier is still pursuing $1.2bn in compensation for aircraft and spare parts stolen during Iraq’s invasion of its neighbour under Saddam Hussein in 1990.

Efforts to broker a deal between the airlines have floundered and the two sides have now become entrenched. Kuwait was enraged when Iraq unveiled a $6bn order for new planes from the US’ Boeing and Canada’s Bombardier, after having claimed it could not afford to repay the debt.

KAC is now attempting to seize the Bombardiers through the Canadian courts and tensions have continued to flare this year.

In April, IAC’s first scheduled commercial flight from Baghdad to London for 20 years touched down at London’s Gatwick airport. KAC’s lawyers were waiting for the plane, carrying an order from the UK High Court freezing the global assets of Iraq’s national airline. IAC’s director general, who was onboard the flight, was briefly detained in the UK. Ahmed al-Saadawi, adviser to the Iraqi prime minister, says that the “fiasco in London” convinced Baghdad that no settlement was possible. With IAC liable for $1.2bn, its debts far exceeding its assets, he says the decision to dissolve the airline was triggered automatically by Iraqi law.

“If a company owes 50 per cent more than its capital, it has to liquidate by law,” he says.

“So when we came to the conclusion that Kuwait does not want to settle and will follow Iraqi Airways wherever it goes, we are stuck with that debt so we have to liquidate.”

The Kuwaitis insist the decision to dissolve is pure political connivance. The news that a committee has already been set up in Baghdad to oversee the establishment of a new airline is unlikely to assuage their anger.

KAC has always insisted that the 2008 deal for new aircraft, though brokered by the Finance Ministry, was always intended for IAC. By avoiding direct ownership of the planes, IAC hoped to dodge liability for the Kuwaiti compensation claim.

Fresh start for air carriers in Iraq

Sources at IAC confirm that the new aircraft will be leased to the new carrier if they are freed from the courts. The new carrier could be established within a year, while a liquidator has now been appointed to dissolve IAC.

For their part, the Iraqis are aggrieved at Kuwait’s insistence on a full settlement. A deal offered in 2008 for up to $500m in cash and a codeshare agreement between the two airlines, would have put the issue to bed and been beneficial to both sides, they claim.

Fundamentally, Baghdad is outraged that it should be liable for crimes committed by the former dictatorship. “We believe it is unfair to expect us to pay that amount which the Iraqi people, the government, the company, is really not responsible for. This was Saddam’s action … so for us to pay that amount of money is unjust,” says Al-Saadawi.

Beyond the travails of the national airline, however, Iraq’s aviation sector is steadily finding its feet. A major step forward came with the recruitment of foreign private security firms to help run the country’s five main airports.

Airport security in Iraq

The Transport Ministry is now working with the Americans on developing a national air security programme that will eventually meet standards set by the Montreal-based International Civil Aviation Organisation.

Improved security at the airports has encouraged foreign airlines to look again at establishing routes into Iraq. The country now has more than 20 bilateral air service agreements.

Bahrain’s Gulf Air has launched flights to Baghdad and Erbil in the past year and recently added Basra to its network. Dubai-based Emirates is still mulling over direct flights to the Iraqi capital. Moreover, European carriers are also entering the market. Germany’s Lufthansa will launch flights to Baghdad in September and Austrian Airlines is planning to follow suit in October. It already flies to Erbil.

During his two-year tenure as head of the Transport Ministry, Abduljabbar also ruffled feathers with a conservative approach to the ports sector. One of his first actions upon taking office was to scrap a planned privatisation of the southern terminal at Iraq’s only deep-sea port in Umm Qasr on the Gulf coast.

As with most sectors, the Transport Ministry has been anxious to avoid the perception that it is selling off the country’s prime assets to foreign companies. Progress at Umm Qasr has stagnated since control of the port was seized from forces loyal to the radical Shiite cleric Moqtada al-Sadr in 2008. Under Abduljabbar’s stewardship, the ministry began offering individual berths to shipping companies for development on one to three-year contracts. Although shipping groups have been keen to enter the Iraqi market, these terms offer little or no incentive for foreign companies to make the kind of investment the port needs.

Umm Qasr needs a complete overhaul, with modern cranes, new real estate and electronic customs equipment. Offering shipping companies a short-term contract with no guarantees at the end of it does not serve the longer term interests of either side.

Cargo throughput and capacity at Umm Qasr has increased and waiting times have dropped, but the port is not placed to compete with other facilities in the northern Gulf. Meanwhile, Kuwait and Jordan’s Aqaba port have established themselves as alternative entry points for goods into Iraq that Umm Qasr cannot handle. “I would have preferred to give the whole port to a good company such as [Dubai’s] DP World, but Abduljabbar reined in this idea,” says Al-Saadawi.

“They may make good money out of [short-term contracts], but at the end of three years you don’t have a port. If you give the entire port to one company on condition that they make it recognised worldwide, well-managed and well-run with modern equipment, at the end of the contract you have a well-run port.”

Baghdad is pushing ahead with plans for a new $6bn deep-sea port on the Faw peninsula, awarding a design contract to an Italian consortium led by Impregilo in January. The transport ministry hopes to invite bids to build the port by the end of 2011, with a contract awarded in 2012. This timetable appears optimistic and it is still not clear whether Baghdad can afford a project of this size.

The US has urged Baghdad to focus on redeveloping Umm Qasr, concentrating on bringing the port it already has up to scratch rather than getting distracted by the project at Faw.

The Transport Ministry is now considering tendering new berths on a seven-year lease, which would help attract larger shipping groups and offer an incentive to invest in new equipment.

Suez rival in Iraq rail netwok

As the international oil companies set to work in the country, the temptation is to dream of Iraq as once again a trade and transport hub between East and West. Officials talk eagerly of a ‘dry channel’, rivalling the Suez Canal, linking the new port at Faw to Turkey and Eastern Europe by rail, all financed by oil wealth.

Baghdad aims to design and build $60bn of rail projects over the next five years and hopes to attract foreign rail groups to invest in the country’s dilapidated infrastructure.

In 2009, Baghdad signed a memorandum of understanding (Mou) with Deutsche Bahn, which runs the German rail network. Other countries, including South Korea and Japan, have expressed an interest in the sector.

However, doubts remain over what guarantees Baghdad can offer and what returns can be expected from the Iraqi market. Few national railways make money and Iraq will not buck that trend anytime soon.

There is potential in the market. The passenger railway now running from Baghdad to Turkey via Syria is stretched to capacity, with 3,500 passengers a week. Other rail construction work though is progressing slowly. The western minerals railway is still working, but repairs are needed to a key bridge on the line. Likewise, the line from Baghdad to Kirkuk must also wait for repairs to a bridge damaged in the war.

For now, the focus is on improving the existing network rather than unveiling new multi-billion dollar projects.

It will take many years to reverse decades of underinvestment and the destruction of key infrastructure. Even when oil revenues do pick up, the country needs investment in every sector. Transport must join the queue.

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