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The new business frontier

May 2009
As the UK and US military forces prepare to leave Iraq by 2011, international investors are moving in. The country's real estate and oil sectors are attracting major interest and UAE-based companies are leading the way, LAURA COLLACOTT reports.
According to recent research by Dunia Frontier Consultants (DFC), UAE-based firms are Iraq's biggest backers, trailed by US and UK companies. The report found that of the $31 billion of investments that have been committed to the country since 2003, as much as 50 per cent originate in the UAE.

One local economic analyst cautions that the figure seems particularly high, suggesting that the figures may conceal British and American money being funnelled through the country. Nonetheless, the numbers indicate that UAE organisations are forging relations with their Iraqi counterparts.

Two example of such companies are the UAE-based Rotana , which has signed deals to manage two new hotels in Iraq; and the Emirates International Investment Company (EIIC) , which this year announced plans to devote funds to real estate projects in Iraq.

Corporate commitment to the country would appear to reinforce government support; last year the UAE wiped $7 billion from the accounts ledger in money it was owed from Iraqi foreign debt. It also reopened the UAE embassy in Iraq.

And it is only fitting that DFC, a company with the word 'frontier' in its name, is reporting these results. Iraq truly has become a frontier like the Wild West - a risky but potentially profitable market. As one of the world's trouble spots, many businesses would consider Iraq one of the more risky outposts of investment. Launching operations here is not for the faint of heart. At present, only a handful of oil and security firms operate in the country, providing only the most basic industrial services. But commitments exist - on paper at least - in other sectors, which could indicate the beginnings of secondary economy and the light at the end of the war tunnel.

Investment is led by two key sectors: real estate and oil. The country has the world's third-largest oil reserves which are untapped in comparison with the more established oil and gas producers. Despite this, oil currently accounts for more than 95 per cent of Iraqi revenue.

Attractive investment
Iraq's development has been slow since 2003, with many international oil companies choosing to wait until they are more confident of the political, bureaucratic and physical stability of their investment. But such confidence is growing and DFC estimates that investment in this sector will increase to $24 billion in 2009 and $48 billion in 2010.

However, investment in non-oil economy has far outstripped that in the oil sector since 2003, laying claim to 71 per cent of total foreign direct investment. Although some of this has been channelled into manufacturing, information technology, utilities and financial services, the bulk is earmarked for property. It is a beginning, but the heavy focus on one sector will struggle to bring any degree of sustainable development to Iraq's economy.

DFC projects that investment in Iraqi real estate could top $40 billion in 2010 as regional investors look for alternative opportunities in the greater Arab world. It is real estate the UAE has put its muscle behind. As Dubai's overloaded property sector falters, the razed landscape of Iraq looks increasingly attractive to investors hunting for virgin markets to exploit.

Kipp Teamy, director at DFC, is convinced that the country poses a viable opportunity for Middle Eastern firms. "With flagging demand throughout the GCC, Iraq would appear a logical choice for those who can move beyond the perceived headline risk of investing in the country," he posits.

Despite those massive investment numbers, insiders say Iraq is still an under-exploited arena. Thamir Ghadhban, head of Iraq's National Investment Committee, claims that there is plenty of room left for further investment and the country is keen to entice foreign currency. "Frankly speaking, the value of investment in Iraq is not that big," he told Reuters.

The Iraqi government desperately needs further foreign investment to support the country's restoration, while the international community prefers that investment goes to setting up a self-sufficient Iraqi economy. French President Nicolas Sarkozy has been vocal in encouraging European companies to 'rebuild ties with Iraq'. But as Ghadhban points out, the investment pledges received so far mean little until the money actually begins to arrive in the country.

"Some provinces have managed to award investment licences worth billions of dollars.

What is important here is not only granting licences, but for investors to actually start executing the projects," he emphasises.

This is vital. Two of the mega projects (so big that some critics have suggested that they skew the investment data) fall under the auspices of Damac Properties and Al Maabar , neither of which are close to breaking ground. Damac is still in the planning stages of its $4.5 billion, 170 million sq ft project.

"Obviously when you've got something as large as that, you've really got to make sure that it's right, that it's launched in phases, that it meets exactly what the customers are looking for and that you have taken full advantage of the topography," says the company CEO, Peter Riddoch, justifying the delays.

A representative for Al Maabar a $10 billion collaborative project between Aldar, Sorouh, Reem and Al Qudra told Gulf Business that the project was unofficially on hold. Nowhere is isolated from the liquidity issues sweeping the globe and these more daring projects would ideally be launched at a time of plenty. As the global economy stutters, the first losers are likely to be these brassy projects, ironically located in areas that need them most.

There are fears that these and other investments and projects will remain paper-bound and not inject much-needed funds into Iraq's economy. Yet Teamy remains sanguine: "2008 projects certainly distort the figures. However, we believe for many reasons they will, for the most part, be realised.

"We've already mentioned the positive effects of the semi-official imprimatur of the UAE government through its opening of the embassy; we also think that rapidly declining security issues, the successful SOFA [Status of Forces of foreign troops stationed in Iraq Agreement], and the phase one oil and gas negotiations will have positive effects as well.

The trends in the first quarter have continued apace, and we're confident that the general trajectory of our estimate is correct."

Relative stability
So while Iraq has deserved its investment-repelling moniker hotspot in the past, as of late it seems to be relatively cooling down. As the US and the UK plan to pull their troops out of the country, democratically elected Prime Minister Nouri Al-Maliki and his security and police forces have succeeded in creating a country that is far more secure than in the troubled 2006-7 period where factions tussled for power. His political campaigns have focused on improving law and order and his policies have been paying dividends.

Media sources support the increasing interest in Iraq with reports that Baghdad's parks once again have families visiting, but the situation is far from ideal. Car bombs still occur with alarming frequency and threats of resurgence are never far away.

In addition, the mechanics of business in Iraq can be a challenge. Despite the efforts of dedicated reconstruction and investment committees, legislation relating to foreign companies is complex and ill defined. Local and central government powers have sketchy communication. Licences and approvals to operate frequently need to be signed off by a number of different government agencies. Land allocated for investment is held in limbo as officials look to codify amendments to pre-2003 legislation in line with 2006 investment law.

Speaking to Reuters, Aqeel Al-Khazali, governor of southern Kerbala province, claims that more than $1 billion of investment is stalled in the region. "We get these investment projects going, but then they get lost in the bureaucratic labyrinth," he complains.

Teamy warns potential investors that Iraq's democracy remains nascent, bringing with it both advantages and disadvantages. But in the main, he is confident about the opportunities: "If current positive trend lines hold, and if a potential investor can get beyond self-imposed assessments of the headline risk, we believe they will be rewarded.

"Iraq has a large regional domestic market of 30 million people who have been deprived of even the most basic necessities for a significant period of time. Even within the current global economic environment and relatively low price of oil, domestic demand will continue to drive the economy forward in the near-to-medium term."

UAE companies with better understanding and synergies with Arab business culture are likely to be in a more favourable position than their US and UK counterparts when it comes to capitalising on the latent potential but however much Iraq's supporters protest security is and will remain a very pertinent issue for investors in the country.

© Gulf Business 2009