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Iraq Reopens for Business
Despite the continuing dangers, the rebuilding of the country could prove to be one of the biggest global investment opportunities to arise in the last half-century.
By Josie Ensor - 9:00PM BST 06 Aug 2011
On July 15, Harlow International, a British construction company, held a ribbon-cutting ceremony for the re-opening of the famous Al-Rasheed Hotel in Baghdad’s Green Zone.
The hotel, renovated with the help of a $65m budget, was made famous in the 1991 Gulf War as a base for television reporters and later became a favoured home of businessmen and diplomats alike.
But at the same time, just a matter of miles away, two car bombs killed seven people and an American soldier was shot dead by gunmen who had opened fire at an army headquarters.
Iraq “remains an extraordinarily dangerous place to work”, Stuart Bowen, the US Special Inspector General for Iraq Reconstruction, admitted in a recent report, adding that the country is less safe than it was a year ago due to unabated corruption and violence.
Unsurprisingly, when investors think of Iraq, they most probably think of risk. After two decades of conflict, to outsiders, the Middle Eastern country is perhaps not the most hospitable place to do business. But in reality, the rebuilding of Iraq – and the by-products that will spring from that process – could yet prove to be one of the biggest global investment opportunities to arise in the last half-century.
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As it stands, Iraq rates as one of the worst places in the world to do business, languishing at 166th out of 183 countries, according to a World Bank report.
For starting a business it ranks even lower, at 174th. That hasn’t stopped a flurry of British businesses doing just that, however. In late June, retailer Mothercare announced its decision to launch its first shop in the country in Arbil, the capital of semi-autonomous Kurdistan in the north. And just two weeks ago, UK-based Afren made a £360m investment in proven oil fields – its first in the country.
Robin Ord-Smith, UK Trade and Investment’s (UKTI) Iraq director, says he is contacted by 10 to 15 British companies every week asking for advice on how to make the move, while for Kurdistan – which enjoys greater stability – the number of enquiries can be double that.
Could it be that Iraq is firmly open for business again? For some of the more hardy investors in the oil and energy sector, the truth is that it was never really closed.
UK oil major BP started drilling in Iraq in 1927 while the country was under British mandate, and only stopped when the domestic government’s 1972 nationalisation of oil pushed out Western oil companies. Iraqi unions vowed at the time to never again allow foreign companies take control of their most important economic resource.
But just four years after the 2003 invasion, the reformed Iraqi government reopened the oil sector to foreign investors, and in 2008 Baghdad signed its first petroleum deal with China’s National Petroleum Corporation and opened the way for British groups.
Since coalition forces announced a winding down of operations in Iraq, many more UK oil firms have widened competition. Last month, oil explorer Afren announced it was making a “strategic entry” into Kurdistan’s Barda Rash field, marking the group’s first major acquisition outside its specialist area of Nigeria.
Galib Virani, associate director, said Afren chose to strike while the iron is hot: “The deal would not be here for too much longer... It’s a relationship deal, we’ve got a good relationship with the government and an early-mover advantage.”
Joining the oil rush, Dublin-headquartered oil and gas firm Petroceltic also stepped investment up a gear last month after buying a 20pc share in two giant exploration blocks in Iraq.
As the country with the third-largest oil reserves in the world, Iraq’s economy is dominated by the oil industry, which traditionally provides more than 90pc of foreign exchange earnings.
The foreign investment law passed shortly after the 2003 invasion now permits 100pc foreign ownership of businesses in all sectors except oil and mineral extraction. Foreign-owned retailing businesses must provide a $100,000 (£61,000) bond before conducting business in Iraq but, largely, the law tries to establish an equality between foreigners and Iraqis on all terms of commercial interaction.
As a result of the legislative reforms, foreign investment has grown from $3.87bn to $42.67bn in the past eight years. And with the government’s coffers swelling, Iraq’s planning minister, Ali Al-Shukri, is on record as saying he is looking to raise its 2012 investment budget to as much as $51bn.
Look outside the oil sector, however, and high operational risks continue to discourage all but the most daring investors. Those in pharmaceuticals who chose to live with the risks have been rewarded with a substantially higher health-care budget. Iraq spent $3.8bn on rebuilding its health-care sector last year, and the ministry of health is said to enjoy the third-largest government budget allocation.
GlaxoSmithKline (GSK) has been the leading British pharmaceutical supplier in Iraq for more than 20 years, and until now was almost exclusively supplying medicines and vaccines to the Iraqi ministry of health. As The Sunday Telegraph reports today , GSK has just signed one of its first deals with a private sector company to manufacture products in Iraq and plans to set up its first local business in the country since the invasion by year-end.
Mohammed Zafrullah, vice- president of GSK in the Gulf Near East, said: “Historically, 100pc of [Iraq’s health-care] products were sourced through the ministry of health, but since the fall of Saddam Hussein the department has taken steps to open up the private sector, which is great for companies like us who have the expertise.”
He said progress was slowed in the last four years by the security situation, but in the past 18 months he has seen a causal link between increasing stability and industry competition.
London-based pharmaceutical company Hikma, which saw sales in Iraq grow to $16m last year, agrees that the Iraqi health market is recovering, and it is keen to play a leading role in that recovery.
“Iraq has clearly been operating in a period of political turmoil for some time,” a spokesman said. “Nevertheless, it offers excellent growth opportunities. At the moment, the market is relatively unregulated, which has allowed for a high level of unauthorised products. We see this as an excellent opportunity. As stricter regulations come into force, we expect to benefit from this.”
GSK and Hikma are not the only ones to capitalise on the gap in the market. At a time when Mothercare is closing 110 of its shops in the UK, its decision to open one in Arbil may seem to come at an odd time. But the baby goods retailer, which has teamed up with long-time Middle East franchise partner Alshaya, is no stranger to the region – its first branch opened in Kuwait in 1984.
A Mothercare spokesman said it would not enter into a country unless there was a good opportunity for growth. “We are going into the northern region in Kurdistan because it is the most peaceful part of the country and there’s a real need for retailers like ours, but there are no plans to go into Baghdad or any more challenging environments,” he said.
“We choose to move to countries like Iraq, but only with franchise partners as they have the contacts and the local knowledge and know how the system works. We capitalise on their expertise and so cut down on some of the bureaucracy.”
John Drake, risk consultant with UK-based security firm AKE Intelligence, says it is no surprise Mothercare has moved to Kurdistan.
“I would be shocked if they had chosen somewhere like Baghdad, but Arbil is a logical place to branch out,” he said.
“Iraq’s a very import-reliant country now – a lot of their factories, which were once heavily subsidised, are now redundant. So there is definitely potential for the retail sector to move in, but it’s a risk and logistically difficult. With small outlets they don’t have high turnover and so may not be worth the risk, whereas larger sectors, like the oil and gas sector, they have more buying power for the necessary security measures. For many retailers, doing business in Iraq is still a long way away. For firms that brave it, they will own a big slice of the industry there.”
But behind the success story lies a counter-narrative, one that reminds us the war has not quite yet been won. The security situation can at times be as fragile as the country’s economy. Figures compiled by AKE Intelligence show a spike in the number of attacks over the past three months.
Over that period, it was not unusual for some of Iraq’s major cities to see up to four suicide attacks in a single day, by insurgents unhappy at the perceived slow rate of the withdrawal of troops. Since the start of the US-led invasion, a mix of militias, foreign fighters and all-Iraqi groups have launched attacks on foreign troops and the post-Saddam government, fighting for self-determination and sovereignty in Iraq.
But the recent return of a more traditional civil airline industry has also gone some way to help improve consumer confidence. In 2009, only six foreign commercial airlines operated in Iraq, whereas today that figure is around 28.
AKE’s Drake, who regularly visits Baghdad for work, said that for the first time in years businesses are holding meetings not just in the international Green Zone, but in the traditionally less safe Red Zone as well.
Part of the revival in UK interest in the region may be the result of a visit in April 2009, when UKTI organised the first official British trade mission to Baghdad and Basra for more than 20 years, with representatives from 23 major British companies. Despite this apparent renaissance however, British companies have been seen to be slow to get in on the investment opportunities in Iraq, even lagging behind countries that opposed the war, such as France.
Last year, French companies accounted for 9.9pc of the foreign commercial activity in Iraq, compared with 2.8pc for British companies, according to Dunia Frontier Consultants, which specialises in emerging markets.
Chris Frost, founder board member of the Iraq Britain Business Council and a partner at PricewaterhouseCoopers, says he senses a frustration among Iraqis that the UK hasn’t woken up to the wealth of opportunities. “When I speak to people in Iraq they are very keen to be able to buy the kind of products they are buying directly from British companies,” he said.
“At the moment, there are a lot of goods they buy that are made in Britain that they are buying through intermediaries in the Middle East who are essentially acting as agents. They would far rather that British companies came and sold the products directly, particularly in relation to luxury goods.”
The Foreign Office is trying hard to encourage British businesses to make the leap. The British Ambassador to Iraq, Michael Aron, says the investment environment remains challenging, but supporting British businesses in Iraq is a priority for this Government.
“Opportunities to invest in Iraq are growing fast and British companies are becoming increasingly prominent here. We will continue to do what we can to help them succeed,” he said.
Risk analyst Drake says British firms could well become the biggest benefactor in the country’s boom time. “Iraqis do a lot of business face-to-face, so if you’re going to be successful there they have got to know who they are dealing with. On that basis I think British companies have the potential to do much better than the Chinese ones for example.
“They would rather do business with a British company because of the historical links between the two. They know we made a mistake invading, but they also already know our weaknesses and failings, unlike China, which is the frightening unknown.”
Ord-Smith of UKTI agrees: “It is a very exciting time to be in this job in this market. Iraqis tell us they have great respect for British companies, the quality of their goods and services, and would like to see more enter the market. So would I.”
But Iraq is not a place where businesses can expect to reap instant rewards. Experts question how long it might take for the country to return to pre-invasion growth levels – some suggest it could take as long as a generation – but Ord-Smith believes it’s a matter of when, not if, the Iraqi market takes off.
And with the level of growth in Iraq one of the highest in the world – the International Monetary Fund estimates the country will grow at a rate of 12.5pc this year – he may well be right. Largely driven by high energy prices, nominal gross domestic product is expected by the IMF to reach $108bn, a new record, with inflation remaining in relative check at a steady 5pc.
All spoken to agree that the most important thing a business can do at this stage in Iraq is to lay down the foundations sooner rather than later, as it will be those “early adopters” who establish a reputation in the country during the tough times that will be seen as friends of Iraq when the going gets good, leading to rich dividends further down the line.
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