By Joanne Bladd
For foreign firms able to see past explosive news reports, the Iraqi capital is the next business frontier.
For foreign firms able to see past the explosive news reports, Baghdad is the next business frontier. As the general election looms, Arabian Business reports on the companies waking up to a new Iraq.
For an army town, it's not an unusual sight; a stampede of squaddies in shorts and T-shirts running through the streets in a training exercise. But when the town is Ramidi, a former Al Qaeda hotbed in western Iraq, and the soldiers aren't strapped, sweating, into bulletproof vests, it's not just a drill. It's a sign the times are changing.
"These are the kind of changes I'm seeing on the ground. If an army unit can take a 5k run through a town, it's a sign the good outweighs the bad in Iraq," says Kipp Teamy, director of Dunia Frontier Consultants (DFC) and a regular visitor to the Arab state. "And what it's saying to investors is that Iraq is wide open for business again."
Iraq is the Middle East's most unlikely gold mine. Bruised by decades of war and crippling sanctions, the country has seen its infrastructure blown apart. Everything from power plants to poultry farms have been razed to the ground, leaving Iraq a blank slate.
The bill for a new Baghdad is likely to top $400bn, and its wishlist is vast. From housing to hospitals, roadways to railways; Iraq needs it all. For foreign firms then, the risks might be high but the returns are higher and as the troops roll out, they are rolling in.
Last year Iraq snaffled more than $156.7bn in capital commitments from foreign firms, DFC data shows; a 241 percent increase over the previous year. The largest slice of the cake came from ten multibillion-dollar oil deals, signed with Big Oil's biggest and set to resuscitate Iraq's rusted crude fields.
But even outside the energy sector, investments are hitting new heights. Iraq cut at least $27bn worth of real estate deals in the first three quarters of 2009. The largest, from a group fronted by UAE's Bonyan International Investment Group, for a $20bn real estate project in Baghdad.
"Clearly there's huge potential for investors in Iraq," says Julien Barnes-Dacey, an Iraq analyst with risk consultancy firm Control Risks. "Quite simply, everything needs to be rebuilt. There will be a lot of oil revenues coming in over the next few years that will give the central government a chance to really push forward reconstruction plans. Iraq has huge potential."
Baghdad is betting on black to push its coffers out of the red, and pay for much-needed rebuilding. Sloshing under Iraq is the world's third largest crude reserves, and its government is keen to exploit them. In January, the state handed out the last of ten licences to foreign firms bidding to operate in its oilfields and has pledged to more than quadruple its crude production within six years. From its current output of 2.5 million barrels per day (bpd), Iraq intends to churn out 12 million bpd - on a par with oil giant Saudi Arabia - the speediest output increase in history.
Even better, it has wrung a ruthlessly tight deal from foreign oil firms, including BP and Exxon Mobil, insisting they pocket less than $2 a barrel and funnelling the lion's share of profit to the central government.
It's an ambitious plan says David Smith, a Dubai-based oil analyst with Celerant Consulting, but there's no guarantee it will proceed on track. Faced with Iraq's decrepit pipelines, oil majors are realistically looking at "three, four years down the line before there's significant product appearing," he says. "It's difficult enough to make these projects run on time and within budget in easier places to work. We're talking about a country with no infrastructure and security risks."
As worrying is the impact a flood of Iraqi crude could have on oil prices. Any surge could force OPEC into fresh production cuts and force prices down, giving Iraq less on the barrel - a pinch, now oil is no longer trading at $147.
With limited state cash to splash now, Iraq's door is wide open to commercial investors. And Middle East firms have been the first to knock. UAE-based outfits poured $37.7bn of private capital into the war-torn state in the first nine months of 2009, 50 percent more than any other country. The Gulf state accounted for 24 percent of all investment into Iraq in that period. Lebanese firms stumped up $10.1bn, and Kuwait-based firms $6.9bn - more than Australia and Japan combined.
Quick to spot a business trend, Bahrain's Gulf Air resumed commercial flights to Baghdad in September - the first Gulf carrier to pick up its route.
"It's a genuine emerging market, there is no doubt about that," says DFC's Teamy. "Oil and gas might be game-changers, but there are all these other great sectors that are offering opportunities. I don't care if you're talking about date palms or cigarette manufacturing. They're all available."
Nearly all the Gulf deals were outside the energy sector, tapping into Iraq's gaping lack of services.
UAE retail giant Majid Al Futtaim Group last week revealed it is in talks to open a branch of Carrefour, the French hypermarket it holds the Middle East franchise for, in the northern city of Arbil. Al Habtoor Leighton, one of the UAE's largest contracting firms, has said it is bidding for tenders in Basra to build ports and other key structures.
At the time of writing, Etisalat, one of the UAE's two telecom firms, is on the verge of snapping up a majority stake in Iraq's Korek Telecom, one of three operators in the war-torn state.
Bloom Properties, an Abu Dhabi-based developer, has gone a step further, closing a $18bn deal to build a sprawling development in Karbala."It's high risk, high reward," says Marcus Giebel, CEO of Deyaar, Dubai's second largest developer. The firm has previously considered branching into Iraq, where 2.5 million houses are needed.
"If you get it right, and there's no revolution and everything is going ok, invest a little bit of money because the rewards are high."
On the face of it then, business is brisk. But the realities of rebuilding Baghdad are vastly more complicated. Of the firms storming the gates to kickstart Iraq's economic revolution, only a handful are Western. Take out oil, and the US accounted for less than one percent of private capital into Iraq in the first nine months of 2009. For investors outside the region, it seems the country is a hard sell. Rather than hearing the ringing of cash registers, says Teamy, the word ‘Iraq' conjures up the sound of explosions.
"The vast majority of people moving and shaking in Iraq, excluding oil and gas, are regional players," he says. "Foreign firms are missing a huge opportunity because they are ignorant of the ground truths in Iraq. This is a market that is very opaque and 2.5 years ago it was swaddled by gunshots, explosions and murders. People will be risk-averse.
"But it's very, very different now and people have not kept up with those changes; they're not seeing the opportunity because they're blinded by what they see on CNN."
According to DFC data, Baghdad's homicide rate is on a par with Philadelphia's. The homicide count in Johannesburg, the home of the 2010 football World Cup, is significantly worse.
"It's a battle of education," says Teamy.
Iraq, for its part, has done its best, luring firms with talk of tax perks, overhauling its financial laws and- for the first time - allowing foreigners to own land outright.
Yet even among local players, despite the talk of multibillion-dollar deals, few have progressed much past the signing stage, says Barnes-Dacey.
"While a lot of interest has been expressed on the part of investors, little action has actually materialised on the ground. It's really only the oil companies that are beginning to put boots on the ground."
Many firms are biding their time for the March 7 national election and the withdrawal of US troops in August, to see if Iraq can cling to its newfound stability.
"Investors are probably going to keep a close eye on the election and the troop withdrawal before committing wholeheartedly," he says.
On the flipside, the wariness of foreign firms has sparked an explosion of homegrown entrepreneurialism as Iraqis themselves rush to fill the services gap. In the last three years, the Iraqi Company for Bank Guarantees (ICBG) has underwritten 1,075 loans worth $1.65m to small and medium-sized enterprises.
FIAFI Group, a Baghdad-based infrastructure services firm, is run by Ragdan El Akabi. The Iraqi-born CEO says he seized on the gap in trade that followed the US-led invasion in 2003.
"The war created an instant high demand for temporary accommodation, logistical requirements... and huge demand for imported goods to satisfy the rate of development in Iraq generally."
The firm has since won contracts in excess of $140m, and is now eyeing Iraq's revamped oil sector to boost business.
For Iraqi firms, roadside bombs aren't the chief concern - El Akabi describes his country's political situation as "relatively stable" - the yawning gulf in financing is. Years of being a banking backwater means the usual pillars of finance, private equity, commercial loan facilities, just don't exist. Less than three million Iraqis have bank accounts, lower than 10 percent of the population.
There is, says El Akabi, "absolutely no financial structure to support growing businesses," hamstringing their efforts to morph into mature companies.
Further complicating the issue is the fact that many Iraqi firms have no clue how to attract the wealth funds and private equity firms that are tentatively sniffing around for business opportunities.
"There is a horrible lack of financing, whether that is FDI or domestic investment," agrees Teamy, "but the problem is, there is a terrible lack of comprehensive business plans. We're battling a mindset that ‘if I have a good idea, people will just get it.' But the market doesn't work that way, not the sophisticated money that they're seeking.
"There's no question that everything is needed, from houses to banks to ATMs. The problem is it isn't spelt out properly on paper. [Iraqis] aren't speaking the language a private equity fund or wealth fund requires."
This is partly why Middle Eastern firms have the edge in the rebuilding process, says Majid Jafar, executive director of the Sharjah-based Crescent Petroleum Group. Crescent, along with its affiliate Dana Gas, has poured $700m into an integrated gas project in the Kurdistan region. The pipeline will eventually churn out 300m cubic feet per day to sustain two power plants, generating affordable electricity for Iraqis.
"As regional companies, we view the risks differently from foreign companies and are better able to manage them," Jafar argues. "This is particularly the case in perception of political risk and also security. Iraq should look to regional companies from the GCC and the Middle East for investment, rather than the West, and this is already taking place."
Sooner or later, though, the lure of profit will steel the nerves of Western firms and competition will heat up. Analysts tout the theory that if there is money to be made, the risks will take a backseat - and Iraq has $400bn worth of rebuild up for grabs.
The newly-tendered oil contracts are a case in point. There has been much speculation over whether the deals, signed with the existing government, will be worth the paper they're written on should the March 7 election sweep in a new party. Yet, without batting an eye, Big Oil is still signing.
"Despite the fact no company has been paid a nickel, companies are still rushing to the gates," says Teamy. "Because they're confident in the medium to long-term of Iraq. It's the wild, wild west out here - and I mean that in a positive way.
"That's why no one is running away from the political problems. It's because everyone knows that Iraq, in the long-term, is a winner. Everyone does."