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Sat 8 Feb 2014 10:42 AM

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Can anyone rebuild Iraq?

After decades of conflict, Iraq has a $1 trillion, ten-year plan to rebuild everything from homes and roads to its oil industry. But as Arabian Business reveals in this special report, it’s struggling to convince investors to put up the money

Can anyone rebuild Iraq?

If you listen to the long list of needs in Iraq you could be forgiven for believing it was building a country from scratch, not developing one of the cradles of civilisation.

“Frankly speaking, we still need the very basics; we need urban development construction, we need 3 million housing units by 2020, we need developed industries and investments of the natural resources of Iraq, we need health institutions, service institutions,” Hamdiyah Al Jaff, the chairwoman and CEO of one of Iraq’s largest banks, Trade Bank of Iraq, said recently.

That is what more than three decades of conflict has done — turned one of the first civilisations in history into a desperate mess of crumbled buildings and towns lacking everything from electricity and shelter to education and jobs.

More than ten years after the US-led international invasion of Iraq and the toppling of former dictator Saddam Hussein, the country is still struggling to form the legal, political and economical structures required to rebuild, let alone move forward to realise the immense potential every analyst claims the country has.

Iraq is one of the world’s richest oil nations but much of the liquid gold remains underground, yet to be extracted and refined for the benefit of the Iraqis. It has the second-largest oil reserves in the Middle East, after Saudi Arabia, but that figure is based on known reserves and in Iraq’s case, discoveries that were made decades ago.

“It’s vastly unexplored for oil and gas, so the exploration has only begun. It has potential to be the largest reserve of oil and gas in the Middle East,” says Majid Jafar, the CEO of UAE-based Crescent Petroleum, which has invested $1.5bn into oil and gas projects in northern Iraq.

Oil revenues are expected to soar by the end of the decade, but there are mixed estimates as to how much. The International Monetary Fund expects Iraqi oil output to increase from its current level of about 3 million barrels per day (bpd) — of which 2.4 million bpd is exported — to reach 5 million bpd by 2018, in line with International Energy Agency predictions of 6 million bpd by 2020. More ambitiously, the Iraqi government is aiming for 9 million bpd by the end of the decade.

IMF mission chief for Iraq Carlos Sdralevich says while the world would be willing to buy whatever oil Iraq can produce, the country’s poor infrastructure in both the production and export of the commodity is holding it back.

That’s not to say Iraq’s growth has been completely hobbled. It has the fastest growing gross domestic product (GDP) of any economy above $50bn, putting it ahead of the likes of China, Libya, India and Qatar, according to the IMF. The economy has been growing by more than 8 percent annually since 2011 and the IMF projects a growth rate of 9.6 percent annually over the next five years.

But that massive growth is almost entirely reliant on oil, making it unsustainable. More than 40 percent of the economic output is due to oil and gas, while about half is a result of government spending, which in turn is dependent on oil and gas revenues. That leaves just a few percentage points for the small-scale private investment currently taking place in the country.

Sdralevich says if the government goes ahead with its 2014 spending plans it will record a deficit and deplete the country’s foreign exchange reserves.

“There’s a structural problem because the fiscal performance depends crucially on oil revenue and that dependence has been increasing,” Sdralevich says, noting that Iraq needs an oil price of at least $105 per barrel to balance its budget, higher than most oil-producing states.

The government has launched an infrastructure programme worth $1 trillion over the next ten years, with all the essential elements a country needs included, from roads and housing to hospitals and schools. It is also planning to boost ten key non-oil sectors, including tourism, agriculture and telecommunications.

Dr Sami Al Araji, the chairman of the National Investment Commission, an agency which helps to facilitate and prioritise international investment in Iraq, says the plan includes increasing petrochemical production to 10 million tonnes per year via the completion of two pipelines, to Aqaba in Jordan and to Syria, once the conflict there ceases.

Iraq’s only deepwater port, Umm Qasr, is also in need of rehabilitation. The previously announced Grand Al Faw $6bn terminal is being built nearby and Al Araji says it will be one of the most important infrastructure projects in Asia, linking East Asia to Europe and Africa.

The strategic location of both ports, near Basra and where the mouth of the Shatt Al Arab waterway enters the Arabian Gulf, makes them a vital element in Iraq’s economic growth prospects. The associated roads and railways connecting the port are also in the rebuilding plan.

The commission has also identified an urgent need for 3 million houses, at least an additional 15,000 megawatts of electricity, a clean drinking water supply, 3G and 4G mobile networks, a landline fibre-optic network, a plethora of new and upgraded highways, rail and airports, 8,000-10,000 schools, 34 hospitals and 1,200 medical clinics.

“To be very frank, the government cannot build that,” Al Araji says. “On the basis of the prices they’ll need $2bn... for housing [alone, plus] the services that go with it: water, sewerage, electricity and so on and of course that will open up to construction materials, transport... it’s a full industry all the way through. And hopefully we can generate all that.”

Al Araji says the plan will be funded through oil and gas revenues, the sale of up to 200 government companies and private investment both locally and particularly from foreign investors.

However, so far international businesses have been reluctant to enter the Iraqi market, despite the enormous growth and opportunities.

The country continues to be marred by violence, with the United Nations Assistance Mission for Iraq estimating 733 people were killed in attacks in January alone. Violence has escalated over the past year with the country’s Sunnis accusing the Shi’a-led government of marginalising them and the Shi’a-dominated security forces of indiscriminately arresting, torturing and killing Sunnis.

Last month, the UN refugee agency said more than 140,000 people had fled the conflict in Fallujah and Ramadi, in Iraq’s central Anbar province, since the fighting began in late 2013.

However, security concerns are not the top priority for most foreign investors, according to Sanjay Motwani, president of asset management firm Sansar Capital. While the violence has escalated in the past year it remains significantly below 2006-08 and that of many North American cities, he says.

“For companies in Baghdad... violence is never one of their top three concerns. What are their concerns? Corruption, difficulty in securing credit, particularly for SMEs [small to medium enterprises], electricity supply and difficulty procuring real estate,” he says.

Iraq is still operating with backward financial systems and regulations that date back to Hussein’s era of a centralised economy. It has been slowly progressing towards a market-driven economy since the new constitution was passed in 2005 but there are still many constraints, including a lack of financial technology, education and expertise, out-dated legislation and in some cases a lack of willingness among Iraqi MPs, who are reluctant to loosen their grip on the government purse strings.

The majority of transactions in Iraq are still done in cash, while the first automatic teller machines (ATMs) were introduced only in the past few years and credit cards are a novelty.

“Everyone talks about the cash environment in Iraq, yes it is a challenge,” Standard Chartered Bank CEO Iraq Gavin Wishart says. “It is surprising that in this day and age international banks that talk to Standard Chartered commonly complain that they need to carry with them hundreds of thousands of dollars in cash — notes — in order to make their business transactions.

“This is clearly not a sustainable model, everybody knows about this. The way forward is digitalisation and technology. The cash economy is an old economy, a cash economy doesn’t work efficiently, it’s insecure and it’s the past, so the banks in Iraq that embrace technology and digitalisation and broaden their offering of consumer bank products, and those banks that really go out and seek new models, new training for their staff, these are the banks of the future, the winners.”

A modified investment law was proposed in 2009, but the Council of Ministers has requested more information before assessing and implementing the changes. Al Araji says he does not expect it to be passed before the upcoming election in April, further delaying much-needed reforms and the country’s reconstruction efforts.

A key plank of the proposed legislation is the establishment of a development fund, which would receive 1 percent of the state budget to support the infrastructure plan.

Legislation was also recently implemented to restructure the Central Bank of Iraq (CBI) to allow it to issue larger sums of foreign currency per transaction and giving it greater powers to maintain stability in the exchange rate, which, crucially, has been stable in recent years.

But accessing finance in Iraq remains difficult. The banking sector is dominated by a handful of state-owned banks, which hold about 70 percent of total deposits.

Private sector credit also is very low as a percentage of GDP, at only 10 percent, which International Finance Corporation’s Andrew McCartney says should be as much as 50-60 percent.

“Whilst [the economy] is growing fast and there’s a lot of profit already out there, there are still large chunks of the economy that remain fundamentally untapped,” McCartney says.

The CBI has forced Iraq’s privately owned banks to raise their capital to 250bn Iraqi dinars ($215m) in a bid to strengthen the banking system and improve efficiency. CBI governor Abdulbasit Turki Saeed said on 27 January that he expected to withdraw the licences of five banks that were unable or unwilling to meet the requirement.

The lack of credit for small and medium sized enterprises also stifles Iraqis’ attempts to bring themselves out of poverty by fulfilling the country’s need for tradesmen such as builders, carpenters and even painters, which in turn is adding to the delay in construction projects.

Sdralevich says domestic businesses also would be far more resilient to the country’s security problems, while Al Araji wants to overcome the reliance on the government for everything from housing to employment and pensions.

“The first challenge is [creating] a new civilisation altogether,” Al Araji says. “You’re taking people from even huts... into a modern city and it’s very difficult for them, it’s a new culture.

“Challenge number two is we have what’s called a ‘government should support me’ [culture] and in an open economy we cannot do that; the individuals will have to pay.”

Wishart says the CBI and the Iraqi government are open to reform and have shown a “real commitment to make significant changes” to improve the financial environment.

However, there remains a perceived risk among financial institutions in Iraq.

“Phobia is a huge influence in why there’s no financing for some projects,” OECD global relations secretariat Anders Jonsson says.

But there are foreign businesses taking the risk, albeit mostly in the oil and gas sector and in the more stable autonomous region of Kurdistan.

Iraq is now Dubai’s second-largest export market (including re-exports), behind Saudi Arabia, with $9.3bn worth of trade in 2012, according to the Dubai Chamber of Commerce and Industry, which last month opened its third international representative office in Iraqi Kurdistan capital Erbil.

“[Iraq’s] improving economic condition and the rehabilitation of its oil industry have pushed demands for goods to a high level,” chamber president and CEO Hamad Buamim says. “It is one of the top ten busiest destinations for our members, and its rapid expansion and rebuilding efforts are leading the push for imports and Dubai, as the region’s main trade hub, is reaping the positive effects.

“With Iraq’s underdeveloped construction sector and limited number of large-scale developers, there are major opportunities for Dubai-based investors. Dubai construction firms have the skills and expertise of building a vibrant and striking city in a short space of time, which they can export to Iraq to help them meet pressing needs for good quality mixed-use housing. At the same time, Dubai is the region’s leading financial centre and can export its expertise to Iraq.

“Islamic finance is one area that has significant potential given the country’s large and growing Muslim population, and potential for increased wealth in line with increased stability.”

Jafar, whose company has been in Iraq for five years, says the investment opportunities are too great to miss.

“Iraq hasn’t quite yet begun to fulfil its potential but if it can get things together on a political front with the right legislation and establish security, the future could be very bright and I don’t think any serious investor in the Middle East can ignore Iraq,” he says.

Derek Nicholson, finance director of Dubai-based Qaiwan Group, which is planning to expand its Bazian oil refinery in Kurdistan, says the present regulatory framework in Kurdistan is “extremely favourable” for investment.

“We have found the KRG [Kurdistan Regional Government] to be supportive on both the historical and prospective expansion of the refinery and this gives us confidence to invest in all sectors that the group operates in,” Nicholson says.

Al Jaff says concern about financial risk in Iraq is completely unfounded.

“The Trade Bank of Iraq is a government bank and the guarantees it presents can be considered as government guarantees,” she says.

“We should all be inside Iraq without any fear or hesitation because the market of Iraq needs you as much as you need opportunities. The increased capital in the world with the limited investment opportunities in the developed countries would be really an incentive for… companies to come and invest in [developing] countries, especially Iraq.

“We can assure you all this is going to be a very good opportunity, [particularly] considering the crisis in the developed countries. The bigger opportunities will be for the early birds; for the institutions who come first.”

Turki Saeed argues the return on investment in the turbulent country far outweighs the risks.

“If I was a foreign investor [and] I compare what I would gain and the [risks] of it, definitely I would be in Iraq since yesterday,” he says.

For the time being, it seems the national rebuilding programme’s ambitious ten-year timeframe remains just that — ambitious. But Al Ajari is undeterred.

“These are the great hopes but hopefully they are realisable. I will always say that you have to start somewhere and our start is now.”

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craig simmonds 6 years ago

In regards to the article " can any one rebuild Iraq" the answer is yes..
I have been proposing an out line to help bring security stability to the region but also production independence to the country.
but there are 2 things the Iraqi people must do them selves
1 they must learn to put their cultural differences aside and work together.2 learn to live together and become united in the future of Iraq.
what I proposed stays in Iraq and becomes Iraq with out western involvement. to become independent and work for themselves.
I have been doing business with a man in Iraq who has become my brother....but because we struggle to understand each others grammar we are delayed. for 6 months now but I still continue but my message must get to the right ears. only co operation and unity can help build towards a stable and peaceful Iraq but it all starts with security stability
I welcome peoples thoughts on this and support
Craig Simmonds

Michael Haas 6 years ago

How much of the "rebuilding" is due to destruction by the United States military attack in 2003?

Coldpisces 6 years ago

The question is who will allow to rebuild it ?

Mick 6 years ago

Even if expats could come in and build Iraq and develop a stable infrastructure...years later, they'd be told to leave like in many arab nations after they've gotten what they want from western and far eastern know how. Just like we see today and everyday in all of the comments from locals of many arab countries. Thanks for your help, now get out.

Aasim 6 years ago

The answer is simply No because of the incredible, unbelievable amount of corruption that has infiltrated all aspects of life. One trillion has already spent in the last ten years with nothing achieved on the ground. So many bad people got filthy rich, that's all. Unless this corruption problem is somehow solved, there is no hope to Iraq and Iraqi.