The projects market in Iraq in 2013

19 March 2013

Apart from the oil and gas sector, Baghdad has seen a fall in awards

There was a noticeable slowdown in the value of contract awards in Iraq in 2012 – evidence of the challenge the Gulf country is facing in its construction effort. Overall, the value of contracts awarded fell 17 per cent in 2012 to $23.5bn. Despite this, 2012 was still Iraq’s second-best year for awards, and about four times bigger than 2010.

With $11.3bn and $17.2bn of civil building projects awarded in 2010 and 2011 respectively, the value of contracts awarded in 2012 fell by 38 per cent compared with 2011, to $10.7bn. Regional projects tracker MEED Projects lists just $5.5bn-worth of building projects scheduled for award in 2013, which, if realised, would represent a further contraction of 38 per cent from 2012.

Industrial and power projects have followed a similar trend. After a surge of awards in 2010, further increasing in 2011, industrial deals grew only marginally last year, while power sector awards fell 40 per cent. There are few industrial projects anticipated and power awards will remain flat in 2013.

Part of the apparent contraction is due to the lack of visibility of future project awards in Iraq. Very few projects outside those needed to build hydrocarbons infrastructure by the Oil Ministry, regional oil companies or international oil companies are tendered openly or awarded within acceptable timescales. Ministries have had chronic problems in spending their allocated budgets; only the Oil Ministry managed to execute anything close to its budget in 2011. Some ministries have budget execution rates as low as 6 per cent, according to the US’ Special Inspector General for Iraq Reconstruction.

Housing projects in Iraq

Potentially the biggest building subsector will be housing. Population growth, a lack of new building projects and sluggish post-war reconstruction efforts in the sector led to a shortage of homes, which the government recognised in its National Housing Plan, part of the 2010-14 National Development Plan. Baghdad allocated $31.6bn, 17 per cent of the total investment budget for 2010-14, to regeneration and new housing.

There are few industrial projects anticipated in Iraq and power awards will remain flat in 2013

MEED Projects has identified 106 housing or mixed-use schemes that include substantial housing developments, worth $26bn, under way in Iraq, representing about 1.1 million housing units. About 50 per cent of these housing projects are now funded by provincial investment commissions or city authorities, and contracts for some 600,000 units have been awarded by them.

A further 18 per cent are private sector investments worth $4.7bn. The remainder come under the auspices of various local government ministries. The Iraqi government’s budget for 2013 reflects this shift: the central government’s construction and housing budget is just ID1.6 trillion ($1.4bn), compared with the central and local directorates’ budget of ID12.8 trillion.

All these residential projects are plagued by long execution timelines and often prolonged delays between contract awards and commencement of work. MEED Projects lists just eight housing projects that have been awarded and completed since 2007, with an estimated total of no more than 10,000 units delivered.

One of the biggest awards of 2010 was a $10bn contract for the expansion of Sadr City in Baghdad. The Mayoralty of Baghdad awarded this to a consortium of Iskaya, Ulubol, Kazova, Kur and Kocoglu of Turkey, along with the UK’s Tarmac. Kazova left the consortium and the project stopped in June 2012 after some preliminary infrastructure work had been undertaken. The project is now on hold indefinitely, pending negotiations with the mayoralty.

Projects on hold in Iraq

This pattern is not atypical. Of 90 contracts for buildings scheduled for award in 2012, 15 were placed on hold or cancelled before the end of the year. A total of 10 residential schemes, with a budget value of $50bn and between 200,000 and 300,000 housing units, are currently on hold.

Of the projects currently known about and listed in MEED Projects, $20bn-worth of transport contracts were scheduled for award in 2013. This spike in awards may be very optimistic as $18.5bn-worth of these schemes are still at the study or design phase.

One $1.5bn deal for the first phase of the Baghdad monorail appears to have been awarded to France’s Alstom without a formal bidding process. In Iraq, it appears that design-build contracts are awarded without a formal bidding process across civil sectors such as buildings and transport. Even so, the award of all scheduled projects in 2013 is at best hopeful.

Despite the apparent contraction in the building, power and industry sectors, Baghdad is expected to invest nearly $70bn in oil projects (both upstream and downstream) over the next three years. This is as much as the rest of the region’s oil sectors combined, with total Middle East and North Africa awards expected to be about $72bn.

Central to Iraq’s upstream plans is the estimated $15bn Rumaila oil field development in the Basra province, which is set to be the biggest contract awarded in 2012-13. It will be operated as a joint venture between UK-based BP, China National Petroleum Corporation and state-owned South Oil Company.

The country’s Finance Ministry announced a $118bn budget for 2013, $45.5bn of which is allocated for investment in sectors other than oil and gas. Clearly, with the oil price sustained at about $100 a barrel, there is capital available for the execution of such projects.

One sector that shows almost no activity in Iraq is petrochemicals. There is extensive downstream refinery activity planned for seven locations, a mixture of brownfield upgrades, expansions and new facilities. Some $40bn of hydrocarbons projects are due to be awarded between now and 2015. Beyond refining, however, there is no activity to indicate that Iraq is embarking on exploiting its oil reserves, and in the future its gas reserves, for anything other than the export market.

Iraq top 15 oil and gas project owners*
OwnerSum of revised budget ($m)
Oil Ministry18,050
Basrah Gas Company17,200
State Company for Oil Projects10,690
North Oil Company8,000
North Refineries Company7,000
National Oil Corporation3,000
Sonangol/North Oil Company3,000
Genel Energy2,900
KEC/Turkish Petroleum Overseas/Kogas2,500
Sonangol/South Oil Company2,000
South Refineries Company1,750
Midland Refineries Company1,250
*=By budget value of future schemes; Kogas=Korea Gas Corporation; MOC=Missan Oil Company; TPAO=Turkish Petroleum Corporation; NOC=North Oil Company. Source: MEED Projects

Much of the activity across the three provinces that comprise the Kurdistan region has, in recent years, been backed by private investment. Public spending remains still limited and constrained by tensions with Baghdad over budget allocations.

As a projects market in its own right, Kurdistan is modest, smaller in value terms than the GCC’s smallest market, Bahrain. Its major awards have averaged about $1.2bn a year since 2005. However, 2012 bucked that trend, with $2.1bn of awards. The volume and value of awards could grow significantly over the next three years, with an average of $4bn-5bn of awards scheduled between now and the end of 2015. A third of this is estimated to come from the oil and gas sectors.

Uncertain outlook for Iraq

With the World Bank ranking Iraq at 164 out of the 182 most difficult countries for doing business, and with the continuing security concerns, two questions remain. Firstly, can Iraq attract the international consultants and contractors required to deliver the volume and scale of contracts planned? Secondly, can an ineffective bureaucracy with a history of poor budget execution spend the money that Iraq’s oil reserves are generating while the oil price remains favourable? The answer to both questions is that this is unlikely except in the upstream oil and gas sectors.

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