Rebuilding Iraq

By Julian Rogers, Deputy Editor

It’s a fractured and fragile country scarred by bloody wars, the shackles of sanctions and a despotic regime. But with green shoots of peace and stability sprouting, the Iraqi government is beckoning foreign companies and investors to resuscitate the nation and unlock its riches. There’s no doubt this is the land of opportunity – but is now the time to finally put Iraq on the business map?

“The reserves are not exaggerated - they are huge, and I am optimistic that this figure will be higher than 115 billion barrels”
-Manouchehr Takin, Senior Analyst at the Centre for Global Energy Studies

An unassuming blue Arabic and English sign hangs from the facade of a non-descript building in the now thriving Karrada district of the Iraqi capital, Baghdad. Inside, captivated brokers and investors gaze up at one of the 46-inch plasma TV screens flashing up ‘buy’ and ‘sell’ prices for abbreviated stock codes. A couple of grey-haired gentlemen gesticulate at the screen while others babble into their mobile phones. The stock exchange, a microcosm of capitalism and free enterprise the world over, has entered a new era in Iraq with the introduction of an electronic trading system – the first of its kind in the country and another milestone towards this nation’s gradual recovery.

Until recently, prices at the Iraq Stock Exchange (ISX) were adjusted using primitive white boards and marker pens, and a traditional open outcry system. With the new fangled technology, trades are executed in minutes instead of the two weeks and more it took for stock certificates to be issued under the manual method. “My first baby was establishing this stock exchange in 2004 but my second baby has been getting the electronic trading system,” the exchange’s CEO, Taha Ahmed Abdul Salam, reveals proudly with a broad smile.

A total of 91 Iraqi companies are registered with the bourse, but for the time being the shares of just three banks and two hotels can be bought and sold using the new platform. Around US$270 million was traded last year – a miniscule amount compared to colossal financial centres like London or New York. Nevertheless, foreign investors (deterred by the old paper system) are now much more willing to take a punt on Iraqi stocks, says Salam. “I have investors from the US, Canada, Europe, as well as Arabs in the region and Iraqis living abroad, who have told me directly that they are very interested in Iraqi stocks now that we have this automation.”

Granted, the ISX going digital may seem a pretty insignificant development when you assess the destruction and carnage that this country has endured after decades of bloody wars, crippling sanctions and tyrannous rule. However, Iraq looks to be finally turning the corner as a new dawn beckons in this land of opportunity. This is a nation that boasts a skilled and educated workforce, gargantuan oil and gas reserves and land ripe for agriculture. It’s a young nation, too, with 40 percent of its 28 million people under 15 years of age. Indeed, Iraq has the raw ingredients to resurrect itself into a prosperous and influential country in the region. And there has been no shortage of companies from all four corners of the globe eyeing up a slice of this juicy pie as the country begins to stabilise. Americans, Chinese, Russian, French, South Koreans, Brazilians, Australians and a whole heap more are vying for, or have already landed, lucrative contracts to build and repair the full gamut of sectors, such as healthcare, energy, transport, education, construction and telecoms, as well as rejuvenate basic services like waste management, electricity and water supplies.

Hussein al-Uzri, Chairman and President of Trade Bank of Iraq (set up in 2003 to facilitate reconstruction and international trade), says now is the time for investors to come to the country. “Iraq is open for business because most of the country is now quite safe and the time is right – we are also seeing Iraqi investors bringing their money back to the country. Iraq hasn’t had investment in infrastructure and industry for the past 20 years because of the sanctions so we need hundred of billions of dollars.”

UK-based Kier Construction assisted in building a port in the south of the country back in the 1980s. Managing Director Phil Cave travelled to Iraq in April to assess opportunities and now feels the time is right for his firm to return. “There is definitely a change in the air and, notwithstanding recent incidents, the security situation has significantly improved over the last year. They are determined to move the country forward and have the means to underpin their priorities. It is evident that the government is working to overcome actual and perceived challenges.”

Iraq itself is shelling out US$15 billion this year on modernising its civil infrastructure, but the fly the ointment is crude oil prices – tumbling around US$100 from last summer’s record high. The sky-high price was seen as an oil bonanza that would provide an additional boost to state budgets. The subsequent nosedive forced overall 2009 spending plans to be slashed from US$80 billion to less than US$60 billion, with some officials panicking about the country’s future spending power. The downturn is another reason why the Iraqi National Investment Commission is looking to attract US$500 billion of foreign investment by 2015. It could include overseas firms being allowed to own land (as opposed to the current leasehold arrangement) in a bid to make investment in the crumbling country a more attractive prospect.

Risk-reward ratio
Despite its obvious opportunities for big business, Iraq isn’t without its problems and any would-be investor is more than aware of this. For starters, the regulatory and legal framework of the Investment Law 2006 appears fuzzy and vague in places to say the least, while government agencies and ministries don’t always sing from the same hymn sheet when enforcing the laws. Also, the security situation, although vastly improved compared to the bloodbath witnessed just a few years ago, spiked again in April and May with a spate of deadly suicide bombings. Bureaucratic red tape can prove a particularly vexing obstacle for foreign companies unfamiliar with doing business in the Middle East; and Iraq has sustained a significant ‘brain drain’ with skilled professionals either killed in the conflict or choosing to flee abroad to escape the bloodshed. Then there are practical problems like unreliable telecommunications and a sporadic electricity supply, which are hardly conducive to a quick recovery.

“Essential services have not improved much,” concedes Mohamad El-Tai, CEO of Iraqi satellite TV broadcaster Al Fayhaa. “Electricity is still unstable and shut off several times a day, which constitutes a significant problem affecting many aspects of the lives of Iraqis.” Indeed, estimates suggest Iraq will need an additional 20,000 megawatts of electricity to repair the country and provide power for new homes and businesses. It currently produces 6750 megawatts of intermittent supplies but a slump in oil revenues has left a US$2 billion shortfall in the budget assigned to develop power supplies.

Putting the troubles to one side, El-Tai believes investment opportunities for overseas firms, particularly those involved in oil and gas, outstrip those of Iraq’s neighbours in the region. “Iraq is a promising market with numerous investment opportunities,” he asserts enthusiastically. “The foreign companies have a strong and competitive wish to invest in Iraq and the government has put forward facilities to encourage this.” He is also upbeat about the country’s future when asked to gaze into his metaphorical crystal ball. “I am optimistic, despite the difficulties that Iraq and Iraqis are facing at present. I believe the tremendous riches of Iraq – be it oil, gas or other minerals, agriculture and water resources – will enable the rebuilding of the country very quickly.”

As the spearhead in the invasion of Iraq in 2003, the United States has benefited the most from lucrative contracts. Indeed, some US$2 billion of American contracts have been signed with over 5000 private equity firms in the last three years alone. Timothy Mills, former President of the American Chamber of Commerce in Iraq and a practising international lawyer, has seen with his own eyes compatriots working to rebuild the country. Speaking to Business Management from Washington prior to his latest departure for Iraq (his 111th visit since July 2003), Mills says the country’s redevelopment is a bright light amid the global economic gloom. “The attractiveness of business opportunities has increased as other areas of the world have retracted, but whether or not to work in Iraq comes down to a risk versus benefit calculation for many company bosses.” But with thousands of companies from countries that played no part in the 2003 invasion awarded reconstruction contracts, do the Americans feel any resentment? “There is a window open for all international companies,” Mills responds diplomatically. “When you go to Iraq and speak to officials they might say they want an American company to carry out a US$50-100 million project to rebuild a refinery or electric power station. But if a US company won’t come and do it they will just find another firm from France, Russia, China or wherever, that will. The need to find companies to do these Iraqi government projects always persists.”

As well as government projects, Mills notes that many US companies who came over in the initial reconstruction phase have branched out into the private sector. He says car giant General Motors (GM) originally set up a maintenance facility in Iraq to service the tens of thousands of vehicles flooding in for the reconstruction effort but has since looked elsewhere for private contracts. It’s a similar situation with construction equipment manufacturer Caterpillar. But whether you are rebuilding an oil refinery or installing software for a telecoms contract, Mills stresses the need for businesses to do their homework first or face failure. “If US companies have not been working in Iraq, either with the government or the private sector, then there needs to be a serious adjustment of the business model and they need to do due diligence. It also means finding trusted Iraqi partners to do business with  and navigate the local nuances.”

Money matters
Although most industries are creaking, one sector lagging light years behind its peers in the region is banking. In Iraq cash is king, with people forced to hoard wads of dinars because the banking system is so antiquated. Transactions are carried out manually, branches can’t communicate electronically with one another and ATMs are virtually non-existent. Paying for goods and services with credit cards is a nascent payment option, too. Shirko Abid, an Iraqi Kurd and Chairman of B-Plan Information Systems, is introducing a much-needed electronic clearing system across state-owned Rafidain Bank’s 155 branches (55 in Baghdad). With the new system Abid says companies will be able to pay salaries directly into employees’ bank accounts, money can be transferred between branches and even withdrawn from Rafidain’s seven outlets abroad.

Rafidain, which holds 45 percent of the country’s financial assets, used to stand proud as the Middle East’s largest bank before falling into a decrepit state. Laurence Hargreaves, B-Plan’s Project Co-ordinator on the ground, is candid in his assessment of the archaic state of the banking industry. “Rafidain struggles to function without a banking system to manage its 4.5 million accounts,” he explains. “There is no communication system to enable any of the branches to communicate to HQ, money can’t be transferred between branches and no unified products can be offered. The legacy of Saddam Hussein’s regime and the two wars have left gaping holes in the balance sheets that need to be filled.” Trying to repair the situation was taxing in the years following the fall of Saddam, suggests Hargreaves. “Until recently, the security situation meant that installations of such large new systems couldn’t be achieved and banks have had to ‘make do’ with an incompatible range of legacy systems.”

For Hargreaves, a reliable and trustworthy banking system is one of the most basic requirements for building a secure and prosperous state. “Many people find it hard to comprehend that a country does not have a system that allows citizens and companies to store, transfer and invest their earnings.” Without reliable voice, postal or internet communications it has been very hard for any bank HQs to standardise – Rafidain is essentially a group of 155 individual banks all operating with unique procedures and systems, and most banks are in a similar situation. Being a government-controlled bank it is sitting on a cash mountain of US$15 billion, which proves extremely hard to manage and invest without electronic clearing and a core banking system. “Every government account is held with Rafidain Bank so once Rafidain starts working, Iraq will start working,” Hargreaves explains.

Dubai-based Roy Froud is Head of the  MEA region for Misys Banking, a global application and services company involved in upgrading and centralising operations at four Iraqi institutions. He believes Iraq’s lenders could eventually “leapfrog” other banks in the Middle East with modernisation. He’s also an advocate of companies setting up in the region and building up a reputation and trust with customers. “Clearly banks here don’t want to deal with companies flying in from the West, dropping software on them and then flying home again. They want partners who are committed to the region and committed to them as customers, and companies with Arabic skills and the right people to implement solutions.”

One of Misys’s clients includes al-Uzri’s Trade Bank of Iraq. He describes Iraq as being seriously “underbanked” when assessing the condition of the financial sector. “Iraq has less than 600 branches countrywide, which is very low compared to regional countries,” he remarks. “Iraqis would be encouraged to have bank accounts if there were better services, better returns on their deposits and good credit policies to allow the banks to lend.” Al-Uzri is also a proponent of the banks playing a much more significant role in the economy and in terms of Iraq’s GDP.

Crude awakening
Of course when it comes to GDP, Iraq’s most prized and coveted asset is its enormous energy reserves. The ramshackle oil sector brings in a mammoth 95 percent of the earnings for a country with perhaps the largest unexploited energy resources in the world. Iraq’s official reserves are around 115 billion barrels (the third largest in the world) but this is based on archaic 2D seismic surveying. Ambitious estimates by industry insiders triple the outdated reserve figure, partly because only 17 of the 80 known fields have been significantly tapped for oil. If the ambitious estimates turn out to be true, Iraq would catapult to the top of the production league table, ahead of neighbour Saudi Arabia. “The reserves are not exaggerated – they are huge, and I am optimistic that this figure will be higher than 115 billion barrels,” suggests Manouchehr Takin, Senior Analyst at the Centre for Global Energy Studies. “Some think it could be 200 billion or higher but these amounts are just estimates.” With rock-bottom extraction costs, thought to be as low as US$2 per barrel, and more than a third of reserves lying just 600 metres below the earth’s surface, you can just imagine the dollar signs flashing in the eyes of the bosses of the foreign oil majors. It’s a tantalising prospect, according to Takin: “Why go to harsh and inhospitable places in the world like the Arctic? It really is entering the unknown and despite all the costs that are incurred, you are not guaranteed to find oil. In Iraq the costs are low and the fields are already there.”

Iraq currently pumps around 2.4 million barrels a day (bpd), of which 1.8 million is exported. But although the industry overall is seriously dilapidated, Oil Minister Hussein al-Shahristani is confident that output can be ramped up to an ambitious six million bpd, although he openly admits that US$50 billion will be needed to achieve this, along with the help and technical know-how of the international oil companies (IOCs). But there are still stumbling blocks: the long-awaited hydrocarbon law, a bone of contention between political factions, has been deadlocked for two years, the industry itself is in dire need of a skilled workforce and technology to boost production, while many facilities and pipelines have been sabotaged or damaged. “I would say the oil industry is on its feet at the moment but the question is what needs to be done to get it to a brisk walk?” says Mills. “Iraq needs to rehabilitate refineries, explore new reservoirs and then extend the pipeline and port capabilities in order to export, so the IOCs will be key because this needs significant investment.”

Meanwhile, the autonomous Kurdistan has signed contacts with overseas oil companies to extract hydrocarbons, much to the anger of Al-Shahristani who has branded these deals as “illegal”. Tensions between Iraq’s leaders and the Kurdistan Regional Government (KRG) are strained to say the least. For the time being, the IOCs are busy preparing and submitting their final bids to the Iraqi oil ministry for the technical service contract (TSC) award ceremony at the end of June. Those that land the highly sought-after contacts will be weighing up the costs versus the risks of venturing into the unknown. “Business in Iraq for oil and gas companies remains far from straightforward,” explains IHS Global Insight’s Senior Analyst, Samuel Ciszuk. “Despite the dramatic improvement in security over the past two years, Iraq still remains one of the most unsafe business environments in the world.” Security costs for IOCs and contractors with a significant physical footprint run in the range of US$8000 to US$10,000 a day, according to Ciszuk.

A large proportion of the recent bombings in Iraq have targeted oil installations. With the IOCs on their way in, there are serious concerns that a deadly bombing and kidnapping campaign could surface. “You have to analyse it on a case-by-case basis; structure your business plan accordingly with respect to your security precautions and security costs,” is Mills’ advice to foreign oil firms. “In vast reaches of Iraq the environment is what the military would call permissive. The military itself does not wear military gear and has declared these areas as safe, particularly such areas as Najaf, the south, Kurdistan and areas of Baghdad.”

The sky’s the limit
Any oilman entering the country will invariably do so by air. And one of the most vital aspects of the recovery effort will be the expansion of routes and regional airports, together with improved security at Baghdad International Airport (previously known as Saddam International Airport). This gateway to the country was an important travel hub in the Middle East in its heyday before UN sanctions were imposed during the 1991 Gulf War. The national carrier, Iraqi Airways, used to fly to destinations all over the world until the embargo forced the fleet, with their distinctive green and white livery, to languish on runways and in hangers for 12 years, like relics of a bygone era. Baghdad and other Iraqi cities were scrubbed from destination boards in most major overseas airports, too. Recently however, several of Europe’s major airlines have tentatively expressed an interest to resume flights. British carrier bmi says it is “ready and willing” to begin services between London Heathrow and Baghdad by summer 2010, which would be the first commercial flights between the two countries since the Gulf War. The only direct link currently between Iraq and Europe is provided by Austrian Airlines.

Iraqi Airways is soaring again too, with new planes on order and new routes planned. It recently launched a scheduled flight to Stockholm, Sweden, and plans are in the pipeline for other European and Middle East destinations. Improved technology and facilities are being installed at the capital’s airport, too. Abdul Wahab Teffaha, Secretary General of the Arab Air Carriers Organisation (AACO), is buoyant about Iraqi Airways’ future. “I believe the foundation is there for a successful and powerful airline that will make its mark on the air transport scene in the Arab world. Iraq is a rich country that is also extremely rich in culture and historical heritage, as well as having a large diaspora.” Teffaha goes on to say: “You cannot deny that there are business opportunities and attractions so there will be traffic. It will not be like the Big Bang but gradually, however long it takes, Iraqi Airways will get out of this situation.”

Apart from improving security, Teffaha is perturbed by the dearth of trained aviation personnel in the country and says it could very well bring the industry down to earth with a bump. “They need to plug the gap after being isolated for 35 years because of wars, embargoes and working in a very precarious situation,” he notes, “but before this Iraqi Airways had an excellent engineering base and a modern fleet.” It’s the same for the airport, says Teffaha. “Baghdad International Airport was a state-of-the-art airport when it was built and although new equipment can be easily purchased it is more about the people who will be needed.”

Those business chiefs brave enough to venture into Iraq through Baghdad International Airport after the coalition forces toppled Saddam were all too aware of the problems awaiting them. Even before passengers touched down on Iraqi soil the aircraft would land using a steep corkscrew manoeuvre in a bid to avoid rocket attacks from surface-to-air heat seeking missiles. Then once through customs they had to negotiate the 12km stretch of road into the city that gained the notorious tag of the most dangerous stretch of highway in the world – a white-knuckle ride avoiding roadside bombs, insurgents blowing themselves up and the common-or-garden drive-by shooting. Many high-ranking officials and VIPs sought the sanctuary of the heavily fortified Green Zone by means of helicopter. Others stumped up as much as US$3000 for a ride in an armoured car to their hotel.

Today, the situation is much safer but with increasing numbers of executives, contractors and government officials flooding in, the dilemma of where to stay is proving rather a headache. Iraq needs tens of thousands of additional hotel rooms to cope with the influx but this will take time. Luxury hotel group Rotana is already developing a hotel in the Kurdish area of Erbil but has announced its intentions to open a five-star development opposite the American Embassy inside Baghdad’s Green Zone. The move left people in the industry “astonished”, says President and CEO Selim El Zyr. “We always go to places where nobody else goes and that is why we are pioneers in this field. We don’t mind taking risks, not at all.” Rotana, which manages a portfolio of 67 properties across Middle East, says its 250-room Baghdad hotel, due to open in early 2012, will cater to diplomats and visiting businessmen. As well as the British and Australian embassies, the new US embassy is located inside the zone and is the largest (the size of Vatican City) and most expensive in the world. Up to 5500 Americans and Iraqis work and live there, although more than half are security professionals.

Apart from hotels and accommodation for foreign workers and visitors, there is a chronic shortage of housing. It’s thought that Iraq needs between two and three million new housing units. This could lead to a whopping US$35 billion of foreign investment in real estate for 2009, according to US-based Dunia Frontier Consultants. Likewise, Mills suggests this shortage will fuel a sharp upswing in construction projects: “You will eventually see a building boom because there is a need for several million housing units and there is the development of a nascent mortgage industry to support this.” He even foresees Dubai-esque development. “Over the next five to 15 years the capital will be redeveloped and you will see a core of office towers in downtown Baghdad – similar to Sheikh Zayed Road in Dubai.” Quite whether Baghdad will ever be lined with shiny skyscrapers piercing the clouds remains uncertain. But there is no getting away from the fact that 10 years from now the capital and country could be unrecognisable. With coalition troops withdrawing and investment pouring in, Iraq is coming off its life support machine, but the crux of Iraq’s recovery will depend on long-term peace and the government being able to squeeze every drop of profit out of its abundant natural resources. And, of course, drumming up the right levels of foreign investment. “Iraq has potential to become either the second or even the most vibrant economy in the Middle East,” suggest Mills. Watch this space.