Open for business

 

As the remaining troops prepare to leave Iraq Dan McAlister investigates the opportunities that exist for companies to invest in the country’s rebuild

Iraq isn’t the first place that comes to mind when thinking about the world’s next major construction hub but with the thought of political stability starting to take shape, the country is increasingly looking to bring in new business.
International energy companies are looking forward to the future as a result of the country being the third largest supplier of oil after Iran and Saudi Arabia. It also possesses a willing workforce ready to help the country rebuild after decades of instability.

Foreign investment and international expertise are hard to come by but a number of new initiatives could see this change in the near future.

Iraq’s economy is dominated by the oil sector, which has traditionally provided about 95% of foreign exchange earnings. As the country looks to move away from this industry to expand into others it is important to look at the history of what has gone before.

In the 1980s financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities led the government to implement austerity measures, borrow heavily, and later reschedule foreign debt payments.

Iraq suffered economic losses from the war of at least US$100 billion. After hostilities ended in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. A combination of low oil prices, repayment of war debts (estimated at around US$3 billion a year) and the costs of reconstruction resulted in a serious financial crisis which was the main short term motivation for the invasion of Kuwait.

Now leaders within the Iraqi government are seeking to pass laws to strengthen the economy. The legislation they are forming includes a package of laws to establish a new legal framework for the oil sector and a mechanism to divide oil revenues within the nation, although these and other important reforms are still under controversial and debatable negotiation.

Since the 2003 invasion, the U.S. government has committed over a total of over $61 billion to reconstruction projects in Iraq.

In 2010, Bagdad signed a new agreement with both the International Monetary Fund (IMF) and World Bank for conditional aid programmes that hoped to strengthen Iraq’s economic institutions.

Property consultancy CB Richard Ellis has recently said Iraq is the fastest growing construction market in the Middle East given the urgent need for housing, infrastructure and facilities, after years of war.

“We do some work in Iraq through third parties, we do quite a lot of work for the oil and gas companies who are very interested in Iraq but they have got quite a lot of interest here in Dubai, so how we service them is to create something here to serve their operations there,” says Nicholas Maclean, Managing Director of CBRE Middle East.

“There is quite a lot of investment money that is quietly going into Iraq from the banking institutions at the moment, to pick up the demand when things are much quieter, so people are putting teasers into the market place. I wouldn’t say Iraq is a large part of our business right now, but it is going to be increasingly important over the next few years,” he adds.

Risk assessment

Of course there are still many risks associated with taking on new projects in the country.

“Iraq is still very much in a state of flux. The country needs everything from a development standpoint, from roads to hospitals, to schools to government buildings. Oil and Gas has been a major focus, but the country needs everything from A to Z. From a security standpoint, things have improved drastically,” Erin Miller Rankin, an expert construction lawyer in the region tells The Big Project.

“There are still violent flare ups every now and then, especially around oil and gas infrastructure. However, Iraq is stabilising and, as compared to other places in the region, has very real and bright prospects for the future.

“Implementing its plans requires it to ensure that its oil and gas revenues get re-invested in other industries. Basra has been a major focus of the oil and gas industry, not only because of its nearby reserves, but also because of itsstrategic geographic location,” she continues.
“Erbil and the Kurdish region is an area that has seen a strong boost in its economy and that is because the security situation there has been stable for some time. A lot of problems that have impacted the rest of the country have not impacted Kurdistan to the same extent. Erbil is therefore beginning to attract tourist dollars which, from a project’s standpoint, has resulted in the construction of and planning of further large hotels in the city,” adds.

“A new investment law that came into force in the last five years has been instrumental in attracting substantial foreign investment from all around the world. Iraq’s continued ability to attract foreign investment in those sectors other than the oil and gas industry will play a large role in the rebuilding of the country. There are a number of projects that have been promised by the National Investment Commission – some have been carried out with due speed, while others lag behind as a result of the country’s dated overall infrastructure. On that note, although there have been rumours of a national railway system being built soon I would not bank on it for a few years still,” she goes on to predict.

There are typical construction-related insurance issues in the country. One area of great importance for foreign investors is the availability of political risk insurance – or PRI contractual risks.

“A lot of our international clients that are interested in investing in Iraq have asked us to look into the prospects of obtaining this coverage. Currently there are a number of insurance providers that provide this type of insurance coverage, though, as always, at a premium. Some of the insurance products that can be provided cover risks such as war, terrorism, kidnappings, expropriation, currency inconvertibility, and other political violence,” Miller Rankin explains.

Current infrastructure

Many have moved to the cities as there are poor water facilities in the country. This has affected agriculture greatly.
The water industry has seen an increase in building activity, with Ecil recently finishing a design and construction project for a water treatment plant with a 2100 cubic metres per hour capacity, that will serve the villages and cities inside the Kurdistan Province.

“We are taking water from the Tigris River and making it portable in supply to the Iraqi people in the cities in Iraq, mainly rural cities around the Kurdistan region. In Kurdistan’s main city of Erbil we have to install and supply the pump. I don’t know the exact cost but it is millions of US dollars,” says Muhammad Bilal Khan a services engineer with Ecil.
A wastewater treatment facility in the city of Fallujah – a project that began in 2004 in the midst of a violent insurgency – was originally intended to cost around $35 million, yet in the end the project cost over $100 million and took seven years to complete. This system serves around 38,400 residents, far short of the 100,000 people originally intended to benefit.

Recently, the Iraqi National Investment Commission (NIC) signed a $7.25 billion deal to build 100,000 housing units as a complete neighborhood, east of Baghdad. A refurbishment of roads is planned as the current road system has been worn out by the army.

Consultants and contractors say airports are among the most challenging construction projects as they must execute work while the airport is still fully functional and active and security processes must be maintained. There are 104 airports with a total of 75 paved and 29 unpaved runways.

A new port is set to be built to add to the current ports and terminals at Al Basrah, Khawr az Zubayr and Umm Qasr.

Beginning of a new era

New proposals include a $70bn national Railway system, a $1.5b metro in Baghdad – which will hopefully eliminate traffic jams- and new schools, housing, utilities and transport industries are planned.

South Korean construction firm Hanoua Company has announced plans to build 100,000 affordable homes in the southern suburbs of the Iraqi capital of Baghdad. The South Korean proposal will effectively half Iraq’s housing crisis, which called for at least two million new homes to be created within 20 years.

Work is due to start on the planned major Al-Fao Port project in southern Iraq in 2012 by a group of Italian firms.
A major project planned is the 10×10 project. Named because of its predicted $10bn dollar value and ten-year delivery timeframe.

“The completion of the concept master plan is a major milestone in the creation of a sustainable community with a strong identity for over 500,000 inhabitants and which will ease overcrowding in Sadr City, with successful delivery having depended on long-term and close partnering with the client, and the world-class skills, expertise and experience of our diverse team of international master planning experts,” says Broadway Malyan Director John Turner.

Broadway Malyan has delivered the concept master plan for the ‘10×10’ project in Iraq, involving a 17km² extension of Sadr City, Baghdad, and the creation of New Sadr City.

The Ministry of Transport plans for a $70bn rail network that will link the Iraqi provinces with high-speed trains traveling at 240 km per hour have been submitted to the cabinet for approval, says a senior ministry official. Alstom, is set to construct a $1.5b metro in Baghdad.

A lack of development in other sectors has resulted in 18%–30% unemployed and a depressed per capital GDP of $4,000 International perspective.

On November 20, 2004, the Paris Club of creditor nations agreed to write off 80% ($33 billion) of Iraq’s $42 billion debt to Club members. Iraq’s total external debt was around $120 billion at the time of the 2003 invasion, and had grown by $5 billion by 2004. The debt relief will be implemented in three stages: two of 30% each and one of 20%.

At the end of 2005, and in the first half of 2006, Iraq implemented a restructuring of about $20 billion of commercial debt claims on terms comparable to that of its November 2004 Paris Club agreement (i.e. with an 80% writeoff). Iraq offered to its larger claimants a U.S. dollar denominated bond maturing in 2028. Smaller commercial claimants received a cash settlement of comparable value.

There have been attempts by the international community to improve and repair the infrastructure of Iraq in the aftermath of the 2003 invasion, when much was destroyed. Iraq was governed, after the 2003 invasion, by the Coalition Provisional Authority and, after June 28, 2004 by a series of Iraq-led governments. During this period efforts were made to repair and replace damaged Iraqi infrastructure, including: water supply systems, sewage treatment plants, electricity production, hospitals and health clinics, schools, housing, and transportation systems.

A major moment for International assistance was the Madrid Conference on Reconstruction held in Spain October 23–24, 2003 and attended by representatives of over 25 nations. Funds assembled at this conference and from other sources have been administered by the United Nations and the World Bank. This assistance has primarily funded large-scale projects and helped the country move on from war.

The bottom line

At a recent function in Istanbul called Future Energy, speakers talked about Iraq’s potential. The Iraq Investment and Reconstruction Task Force (IIRTF) were there and a number of different construction projects that are under way or planned were discussed. Basra, Iraqi Kurdistan, Bagdad all have plans to increase their financial stability.

While the Iraq Stock Exchange (ISX) is up about 50% over the last twelve months, prices for residential and office space in the Kurdish capital have more than doubled with single detached houses of 600 sq m city’s Italian Village development now listed at US$ 1.5 million, up from only $600,000 a year ago.

A common theme from the speakers at Future Energy was that Iraq must be patient as it moves from a very centralised regime to decentralised local governance. Conferences have been held in other major cities such as Istanbul and Amman in relation to the country’s future.

While it may be a risk to invest in the country, those who do, may find it a worthwhile venture. The bottom line is Iraq needs as much business as it can get.