Just like starting over

By Ben Thompson

As the holy month of Ramadan drew to a close, Iraqis had more than just fasting and prayer on their minds. In the early hours of Thursday, August 19, nearly two weeks before President Obama’s August 31 deadline for the withdrawal of all American combat troops, the 4th Stryker Brigade, 2nd Infantry Division crossed the border from Iraq into Kuwait and thus ended official US combat operations in the country.

“The security situation has improved tremendously since 2005 and 2006, but is still considered far from normal. It is a risk that investors must balance against the lucrative returns that are possible from their planned investments in Iraq.”

The withdrawal provoked mixed reactions across the war-ravaged state. Prime Minster Nouri al-Maliki called the move "a basic step in restoring complete sovereignty", and reiterated that his forces were up to the job of protecting the country in the absence of the Americans, while President Obama stressed that "the Iraqi people now have lead responsibility for the security of their country". But on the streets of Baghdad, Basra and Iraq's other population centres, the news was largely met with a mixture of anger and apprehension. For while many openly opposed the huge US presence in their country and rejoiced at their exit, most also recognised that their fledgling democracy currently stands at an extremely fragile stage in its development, and that the Americans' withdrawal leaves the country's immediate future delicately balanced - between independent progress on the one hand, and outright anarchy on the other.

"They must secure the borders before completing their withdrawal... otherwise they will leave the country in chaos," one concerned Baghdad resident told Reuters, and it was a view echoed across the nation. Hasnaa Ali, a Baghdad schoolteacher, agreed. "What have the Americans accomplished for this country that they can now decide to just leave?" she asked of a Time reporter. "We don't have clean water or electricity. Prices for everything are very high. There is no security, no jobs, no housing." Baghdad trash collector Ali Nasar typified the prevailing feeling within urban Iraq. "When the occupation forces came to Iraq, it was good they got rid of Saddam, but in fact everything got worse: security, electricity, water and garbage," he lamented. "When they leave, nothing will be improved or return to the way it was. No matter if the Americans are here or not, Iraq is a ruined country."

It's a pessimistic outlook. But like it or not, US combat troops have now left the country, leaving behind an unfinished US$53 billion rebuilding plan and some 50,000 personnel to advise and assist the local populace in its reconstruction efforts. It is time for the next phase of Iraq's rebuilding process to begin, one led by local initiative and willpower rather than foreign military might. And slowly but surely, the green shoots of recovery have begun to take root across the country.

Opportunity knocks

Namir El Akabi is just one of many Iraqi nationals returning from exile to help play a leading role in the future development of the country's recovery. Having left Iraq at the age of 10, the London-educated 46-year-old businessman and entrepreneur returned seven years ago with a clear vision: that of helping his homeland back to prosperity. "It was always my dream to return to Iraq," he says. "I know the potential the country has in every sector, and to be honest I saw an opportunity for huge business in Iraq."

El Akabi formed a small construction company called Almco with just five employees, primarily to work on US-funded strategic projects geared around stabilising the country and providing essential services to both the local population and occupying troops. The business proved to be a success, and today Almco has more than 6000 Iraqis on the payroll, fulfilling roles in infrastructure development, construction and design, supply and logistics and environmental protection. To date the company has been working extensively with the US government on contracts worth US$200 million to provide a variety of construction, renovation and demolition, design/build, and life support projects throughout Iraq as part of the overall reconstruction effort. Primarily this has involved the construction of camps to be used by the US and Iraqi forces for their operations, but it has also included work on significant infrastructure projects, too.

The Sadr City water treatment plant is just one such example. Home to two million Iraqis, the city - located just outside Baghdad - was built by Saddam Hussein as a massive urban community to house the thousands of rural Iraqis migrating to the Baghdad in search of jobs. But after decades of neglect under Saddam's regime, even the most basic areas - including adequate potable water - were severely under-resourced. Almco was commissioned to construct a water treatment plant to help meet the needs of the local population. Completed just over two years ago, the US$65 million water treatment plant is designed to treat and purify water from the nearby Tigris River and provide Sadr City residents with potable water. The goal of the project was to provide hook-ups to residences in 68 of the 79 city sectors, and according to the Iraqi Ministry of Water Resources, the water treatment plant is currently producing between 3200 and 4000 cubic meters of potable water per hour, which equates to 25 million gallons of water a-day. At full capacity, the plant can produce over 6000 cubic meters of water per-hour. "This is one of the major projects we are very proud of. It was a very technically challenging project," says El Akabi. "Water is the essence of life, and its impact on Sadr City's standard of living will be dramatic."

Indeed, he believes that working on more than 50 US Army Corps of Engineers (USACE) projects has helped him and his employees develop their talents. "We learned many things ethically and technically," he explains. "Firstly, that the truth is always the way out. Be truthful with your clients and they will understand. Then there is the technical part: how to do construction the correct way with regards to safety and the quality of materials used on-site. We learned a lot of things working with USACE."

Hydrocarbon footprint

It's been a successful relationship. But with this area of the business on the decline due to the pullout by the collation forces, Almco is now transferring its attention to a number of other potentially lucrative markets. For instance, the firm is working with international oil and gas companies such as ExxonMobil, BP, Schlumberger, Weatherford and Petronas on the initial stages of the IOC mobilisation into Iraqi oil fields - a business that El Akabi expects to hit the US$1 billion mark for his company in the next few years. Almco is currently constructing IOC camps and offering life support and catering services for international firms, while at a later stage work will include more involvement in the various engineering, procurement and construction operations as well as significant operation in building out and maintaining the extensive pipeline network that will be required.

With proven oil reserves totalling 115 billion barrels and proven gas reserves of 112 trillion cubic feet, Iraq is up alongside major producing nations like Saudi Arabia and Russia when it comes to its hydrocarbon resources. The economy is estimated to have expanded 4.2 percent last year, powered largely by oil exports; companies including London-headquartered BP Plc, Royal Dutch Shell, which is based in The Hague, and Paris-based Total SA, have signed contracts with Iraq to boost oil production after two bidding rounds for development rights last year, even in the absence of a hydrocarbons law. A third bidding round for natural-gas deposits is set for later this year.

However, unlike its rivals, Iraq's turbulent recent history means the country is severely lacking both the money and technical resources to further develop its fields and increase its output. Furthermore, for the companies already operating in Iraq or hoping to enter the country in the future, one of the most pressing concerns is the uncertain security environment. In a recent study by the Economist Intelligence Unit, 64 percent of executives - drawn from companies currently investing in Iraq and those considering it - thought it was still too dangerous to do business in Iraq, but 55 percent said they believed the security situation for foreign executives and employees would improve over the next two years. Violence was the biggest business risk for 67 percent of respondents, followed by corruption (44 percent) and the lack of infrastructure (35 percent).

"Security is still an issue in Iraq, but not a major one for local companies," says El Akabi, although he does concede that during the height of the insurgency his firm was experiencing a terrorist incident every week - either an attack on one of its convoys or at a project site, or the kidnapping of an employee. "The security situation has improved tremendously since 2005 and 2006, but is still considered far from normal. It is a risk that investors must balance against the lucrative returns that are possible from their planned investments in Iraq. The market is still virgin territory, with huge untapped resources."

Sharjah-based container terminal operator Gulftainer recently announced plans to pump around US$60 million into its Iraqi expansion. Given that Iraq will be dependent on foreign imports to rebuild the country, it's a potentially rewarding opportunity, and CEO Peter Richards believes the likely benefits of his firm's contract to build out the container terminal gateway at Umm Qasr, just south of Basra, far outweigh the risks. He agrees that security is an issue - but suggests that the lack of basic infrastructure is just as much of a problem. "It is a challenging place to operate; many years of war has left the country and in particular the infrastructure broken, and security is still a concern to many," he says. "However, that just makes it even more important that we focus on getting the basic infrastructure right, as that is the very basis of a working economy and thus a country returned to prosperity."

Obviously, security and political stability are the major obstacles at this point in time, he says, because without these it is very hard for any country to make progress. "The authorities are doing what they can to build a stable base - through, amongst other things, the contract awards and invitations to foreign companies to come and assist in the rebuilding process - while the strict focus on security, now more or less in the hands of the Iraqis themselves, has also helped," he continues. "The situation is certainly much improved compared to just a few years ago. However, a more basic obstacle is the level from which the country has now been forced to grow. With most infrastructures basically demolished and an enormous need to rebuild, growth just cannot happen fast enough; our responsibility is to make sure that while it happens as quickly as possible, it also happens in a responsible manner."

In fact, he believes that some of the reports coming out of Iraq are exaggerated - and that if you know how to operate, you can do so safely and to the mutual benefit of both Iraqis and the companies assisting in the rebuilding. "At all our facilities, security is paramount," he says. "We employ security personnel and our compounds are closely guarded. But besides this, it is also a matter of staying in positive contact with the local population and not portraying yourself as the big outsider. We simply want our employees to feel safe enough to focus their attention on the real work of making the many projects come to life."

Building boom

There is certainly enough work to go around for those willing to brave the volatile operating conditions. According to the EIU report, Iraq's oil and gas reserves were the most attractive aspect of the country for investors, but after this 43 percent said construction and real estate was the most promising non-hydrocarbon sector.

Indeed, the Iraqi authorities want to build on a massive scale. Around one million new housing units are planned for the next three years - one project in Baghdad's Sadr City slum calls for 75,000 units alone - while the National Investment Commission has put together a wish list of 750 projects that require US$600 billion worth of investment. As such, private sector investment dollars as well as expertise are greatly needed in all sectors. "With some $25 billion in housing projects, US$8 billion in transportation and US$5.5 billion in water and sewage, the government is focusing primarily on reconstruction and rehabilitation," confirms Fady Darwish, General Manager of IFP Iraq. "Several new cement plants are either being revamped or erected to satisfy a growing need, and many major international players are now present. Iraq consumes around 15 million tons of cement yearly, with the Iraqi ministry being the largest consumer."

It's good news for foreign firms. Iraq's reconstruction has created a huge demand for both construction expertise and capital, and the Iraqi government has publicly stated its need for the participation of foreign investors to achieve its objectives. In light of this, the Iraqi Investment Law was amended in 2009 to attract both local and foreign investment into Iraq, with generous benefits including 10 years' exemption from taxes and three years' exemption from import fees for required equipment, the ability to repatriate profits from investment and employ foreign workers when needed, and guarantees that the government will not nationalise or confiscate investments.

"The domestic construction industry is non-existent due to the lack of transparent investment criteria and the lack of essential infrastructure such as electricity," says El Akabi. He feels that the way to address this is through encouraging more foreign and local investments in the short-term, while in the long-term the Iraqi Treasury should set aside a large surplus from the expected growth in oil revenues over the next five years to invest in the infrastructure sector. "The most important thing is for the Iraqi government to establish industrial free-zones with complete infrastructure, along with incentives such as 10-year tax and customs exemptions for the materials that will be used in the construction industry. Also, it is vital to privatise and liberalise the industry sector in Iraq; the private sector must take the lead in order for the industry to grow rapidly."

Almco is a good example of the new entrepreneurial spirit that is taking root: alongside its work with the US forces and the oil majors, the company has also diversified into the real estate, hospitality, retail, health and agricultural sectors to take advantage of the many opportunities on offer, through the formation of its Amwaj International investment arm. "Our scope of work is to evaluate, study and submit for potential investment opportunities in the Iraqi market through the Iraqi government," El Akabi explains. "So far we've been awarded one megaproject at Baghdad Gate and one medium-sized project, a shopping mall in Palestine Street in Baghdad. Almco's superior past performance and experience - with hundreds of recommendation and appreciation letters - played a major role in winning these tenders."

The Baghdad Gate project is indicative of the forward-looking nature of many of these schemes. The first comprehensive real estate investment project of its kind in Baghdad, it will cover 258,000 square metres in a strategic location in the heart of the city, opposite Zawra Park, and will include commercial, residential and business units and an advanced infrastructure consisting of an electricity distribution network, a sewage network, roads and sidewalks as well as gardens and stunning natural views. "We believe the time has come to reflect the desire of the Iraqi people to overcome all obstacles and challenges, which is why we have commenced with this innovative project," says El Akabi. "We will continue to work towards our vision of implementing investment projects that provide employment opportunities to Iraqis and respond to their various needs as a means of combating unemployment and elevating the level of basic services - which will, in turn, elevate the standards of living in iraq."

Local talent

El Akabi's vision highlights another key issue: that of rebuilding the Iraqi talent pool. Indeed, both Richards and El Akabi are adamant that international firms have a valuable role to play in assisting Iraqis to rebuild their broken economy. "We want the Iraqis to form the basis of these projects and we obviously employ a majority of locals at our facilities - but we also believe that at this point in time, the expertise and managerial skills to operate from day one simply do not exist to a large enough extent in Iraq," says Richards. "Hopefully, in time we can help to build these skills in the locals. Domestic companies, owned by and employing Iraqis, will gradually grow out of this rebuilding process, as long as the government makes sure that the international companies are incentivised to employ locals and that the locals are encouraged to work hard and learn. But none of this will happen overnight."

El Akabi agrees, and sees education as a key enabler. "We need to look hard at education as a fundamental and imperative factor that would play a major role in rebuilding the nation," he says. "Iraq has been a prison for the Iraqi people for the past 30 years; the simplest technologies - such as the internet and satellite TV - have not been available, while education has deteriorated to a very low level." He also believes the knowledge and experience gained by expatriate Iraqis could be put to good use in the rebuilding process. "In my opinion, it is vital for Iraq's long-term growth that Iraqis living abroad as doctors, engineers, experts and other professionals in different fields return to the country. These individuals will bring new technologies, skills and knowhow, and most importantly can share their experiences in the West with the present Iraqi workforce."

Gavin Jones is a founding partner at Upper Quartile, a business specialising in post conflict economic reconstruction, and he believes there is currently a severe shortage of skilled and experienced personnel and project managers capable of leading the planned expansion. He also feels that the skills shortage is currently being largely ignored and that opportunities need to be made available to Iraqis in order to get them involved. "There needs to be some form of skills development put in place, probably with Basra University or certainly one of the state-owned universities, and that should include things like English language training and technical skills," says Jones. "But the university hasn't really been engaged and there are no training schools. It's quite clear that you're going to need a very large amount of people who can work in the very short-term, and nobody has got that sorted out yet."

Overcoming such a shortage - particularly in the oil and gas industry, which will likely provide the bulk of future funding for the reconstruction process - is key to the country's future development; following the draw-down of American troops, the country's rebuilding process - like its security - will be left largely under the governance of its own population. But in people like El Akabi and the countless other expatriate Iraqis returning to help Iraq back to prosperity, the future looks brighter than it has in a long time. The number of foreign firms - including many Gulf-based companies - looking to enter the market and lend their expertise is also encouraging.

In addition, of course, a considerable number of US military personnel will remain in Iraq, and their skills and knowledge will also prove invaluable to the rebuilding process. Their presence may continue even past the December 31, 2011, deadline agreed to by the two countries for a complete withdrawal; after all, troop presence - or the lack thereof - is not necessarily an indicator of success. But it does represent another milestone in Iraq's long march back to normalcy.

FINDING WORK

Billions of dollars have been allocated to reconstructing areas of Iraq - and the much-needed work is giving construction companies plenty of opportunities to help rebuild the country and make money while doing so. But how can foreign firms get a foot in the door?

Be honest about your own skills and expertise. "Iraq is a very interesting market, but it is also a very challenging one," says Gulftainer's Peter Richards. "Potential profits are lucrative - but the risks are equally high if you are not 100 percent on top of what you are doing." In the words of the boy scouts, be prepared - and know your limits.

Look for a strong and reputable partner. In such a volatile market, local knowledge will be essential in circumventing unnecessary bureaucracy and avoiding troublespots. "The experience and technology knowhow of the international companies, plus the local partner's contacts and cultural knowledge, will provide a great formula for success," says Almco's Namir El Akabi.

Involve the local population. Using local hires builds confidence in your firm and expands the domestic talent pool, says Richards - both critical to achieving long-term success. " Get them involved," he says. "For their motivation, for your own security, because they still know the ins and outs of their country despite you sitting on specific knowledge or patents - and because it's the right thing to do."

IRAQ'S BUILDING BOOM

HOUSING

Iraq is already faced with a housing supply shortage, and coupled with a rapidly growing population that is expected to reach 40 million by 2025, Iraq will need a considerable number of new housing units in a relatively short period of time. The Iraq Ministry of Housing and Construction estimates two million new homes are needed by 2015 with 85 percent of demand to be fulfilled by the private sector. According the Iraqi National Investment Commission, private foreign investment in Iraqi housing is expected to grow with estimated upper-range investment of US$40 billion in 2010. Partnering with local developers would enable foreigners to bypass a rather steep learning curve that is always present when entering new markets. Moreover, the slowdown in competing markets, especially in the Gulf region, presents an excellent opportunity for foreign investors.

MATERIALS

Great opportunities exist in the building materials sector as Iraq currently imports most materials used in the construction process. Today, for instance, local cement production only meets 25 percent of domestic demand. The country is in desperate need of new production plants for everything from cement to steel to aluminium, and with a major expansion of the container terminal gateway at Umm Qasr in the works - which will be able to handle larger ships and even more foreign imports - the potential for regional and international suppliers is considerable.

POWER

Since 2003, Iraq's electricity consumption has grown steadily by at least 15 percent a year - but currently, Iraq's power system barely meets half of peak demand. To meet the growing demand and supply shortfalls, the Ministry of Electricity is undertaking one of the world's most ambitious electricity system expansion programmes, requiring at least US$7 billion. Iraq's Council of Representatives is currently considering a draft law to grant authority for the Ministry of Electricity to engage domestic and foreign private companies in the production of electricity.

TRANSPORT

Every part of Iraq's transport system requires investment, as accelerating demand for air, seaport, road and rail freight services puts mounting strain on existing capacity. Iraq has a network of 44,000 kilometres of roads and highways, of which 85 percent was built in the 1970s and 1980s with little to no maintenance since. Rehabilitation of the roads alone is estimated at US$1 million per kilometre, and total rehabilitation could exceed US$40 billion.

CLIMATE CHANGE?

Seven years after the invasion that ousted Saddam Hussein, Iraq is still waiting to revamp business laws that would help make the country more attractive to investors, according to a report from Bloomberg. "Investors still note security concerns, but now are more likely to cite regulatory hindrances and other practical barriers to doing business," the US State Department said in its 2010 Investment Climate Statement on Iraq.

Foreign direct investment totalled US$1.1 billion in 2009, most of it in the oil industry, according to the United Nations July World Investment Report. Neighbouring Iran, however - under a fourth set of UN sanctions - took in three times as much.

Thair Feely, Director of the government's Baghdad Investment Commission, claims that lawmakers in the outgoing parliament weren't able to approve 72 draft laws meant to help accelerate economic growth. Legislation awaiting approval includes a measure that would make it easier to register a company. "It can take four or five months and costs a fortune, about $15,000 to $20,000, compared to only $300 in the UK," said Feely. The World Bank estimates it takes an average of 77 days to open a business in Iraq, almost four times the average in the region.

Issues such as a cash-based banking system, corruption and limitations on land ownership have also damped investment. Iraq's National Investment Law of 2006 bars foreigners from owning land, though it was amended in November to allow non-Iraqis to buy property for housing projects. Meanwhile, Berlin-based Transparency International placed Iraq in fourth to last place in its 2009 corruption index of 180 countries.

Nevertheless, the government has pushed through some measures to attract investors. The National Investment Law exempts foreign companies from paying taxes for 10 years and from paying import fees for three years. But even so, Iraq needs US$400-500 billion to get things back on track, according to the Baghdad Investment Commission's Feely. "Unfortunately, we only receive hopes and promises," he said. "We can't do it without foreign investment. We can't do it on our own."

UAE FIRMS LEAD THE WAY

Negotiations between the Iraqi National Investment Commission and several UAE real estate developers to build big projects in different parts in Iraq have reached "advanced stages", a top Iraqi official announced earlier this year.

Sami Al Araji, Chairman of the Iraqi National Investment Commission, said the projects under negotiations are worth nearly US$70 billion and that the talks will be finalised in the near future. "The two sides are serious in their desire for the talks to succeed, and things are going well," Al Araji told Gulf News.

While some UAE companies already have a presence in Iraq's northern region of Kurdistan, the negotiations underway are on "big projects all over Iraq, in Baghdad, in Central Iraq, and in the south," the official explained. Projects under discussion are Al Rasheed Compound, The Banks of Karbala and The Future City, while UAE companies involved in the discussions include Al Maabar, Bloom Properties, National Holdings, Bonyan and Al Hanthal.

Abu Dhabi's international investment company, Al Maabar, had unveiled details for a Baghdad development project located at the Al Rasheed Military Compound in October 2008. The company is backed by all four major Abu Dhabi developers - Aldar, Sorouh, Reem and Al Qudra. According to Iraqi reports, the US$20-billion development will stretch across 1250 hectares and comprise several key clusters, including residential units, a commercial district, a technology centre, a hotel and hospitality district, healthcare and educational districts, and public facilities such as mosques and gas stations. A great section of the site will also be devoted to some of the largest entertainment centres in Baghdad.

"UAE companies are the top companies investing in Iraq real estate," confirmed Al Araji.