Zaab
Sethna is a partner at Northern Gulf Partners. It is one of the leading
investment companies in Iraq. Below is an interview with Sethna about the
reasons why foreign investment is increasing in Iraq, what sectors are
attracting attention, and the difficult process the country is going through to
open itself up to private enterprise, trade, and diversification. Overall, he
is quite optimistic about the future of the country.
1. Recently there has
been a huge jump in foreign investment in Iraq. According to Dunia Frontier
Consultants there was only $2.7 billion in 2007. That then jumped to $17.9
billion in 2008, $28.7 billion in 2009, $39.6 billion in 2010, before reaching
$55.6 billion in 2011. One major reason for the increase seems to be the end of
the civil war, and major fighting in 2008. Today, how much does concern over
security play in investing and doing business in Iraq?
The security situation in Iraq has certainly improved
significantly. There have been virtually no incidents involving foreign
companies in the last couple of years and the oil-producing areas of southern
Iraq have seen few incidents of any kind. Nevertheless security remains a
primary concern for foreign investors, and definitely adds to the cost of doing
business in Iraq. Of course another major reason for the spike in foreign
direct investment are the oil and gas contracts, which the Government of Iraq
signed with major international energy companies in the last three years. The
massive investment required to develop Iraq’s hydrocarbon reserves is only just
beginning, and I would expect to see foreign direct investment numbers
continuing to go up dramatically.
2. What do you see as
the other major reasons why people are interested in investing in Iraq now?
Iraq is
currently poor, but it has the capacity to lift itself quite quickly into the
ranks of the middle-income countries, and eventually to the level of the Gulf
States. Obviously, oil and gas is the primary driver of the Iraqi economy, but
Iraq is a country with vast needs in almost every sector. With a population of
30 million who have been cut off from the outside world for generations the
possibilities for growth are enormous. As per capita gross domestic product
(GDP) increases, we expect it to double by 2020, there will be great demand for
everything from consumer products to financial services to healthcare. Iraq is
attractive to foreign investors because the population is relatively young,
there is a history of an educated middle class, and there are possibilities to
develop the non-oil economy in areas such as agriculture, technology, and
industry.
3. When people think
about Iraq’s economy, oil is the first thing that comes to mind. Companies are
actually putting their money into a wide variety of industries today. Can you
tell us some of those fields that are garnering interest?
Telecommunications
is one sector that has seen huge foreign investment. There are three extremely
profitable mobile phone carriers all of which have significant stakes held by
international operators. There are also two national CDMA carriers, which is a
different mobile technology, and they are both foreign-owned as well as a
number of internet service providers and other telecoms companies. Financial
services is a sector that is interesting to foreign investors. The market for
financial services is still nascent in Iraq with unsophisticated banks, no asset
management industry, a primitive insurance sector, and virtually non-existent
capital markets. International financial institutions see the opportunity, so
they are investing in Iraqi banks or in building their own networks. Housing is
another area where we are hearing of large foreign investments although how
real these are remains to be seen.
4. What countries
seem the most interested in putting their money into Iraq these days?
Definitely
regional countries are at the forefront. The Gulf Cooperation Council (GCC) and
Turkey are leaders in investing in Iraq, although not all GCC countries are
there. The United Arab Emirates and Kuwait are probably the most advanced
followed by Qatar. Saudi companies are still hesitant to invest, and that is
probably a reflection of the chilly diplomatic relations between the two
governments. However in the last year we are also seeing increasing interest
from European, U.S. and Asian firms, and 2013 should see a flurry of deals.
5. The World Bank has
ranked Iraq one of the most difficult places to do business in for the last
couple years. What kinds of problems do companies face when entering the Iraqi
market?
Iraq is
undergoing three transitions simultaneously: from war and occupation to
post-conflict, from sanctions to free trade, and from socialist central
planning to a market economy. Such
transitions are wrenching at the best of times, and few countries in history
have had to undergo all three at the same time. Foreign investors have to bear
this in mind, and realize that while change is taking place it is happening
slowly and incrementally. The problems that companies face arise mostly from
Iraq’s recent history: lack of infrastructure, security, corruption, red tape,
and uncertainty in the legal and regulatory environment.
6. What role does the
lack of a modern and private banking sector play?
The financial sector is changing quickly as Iraqi banks
offer new products and services, and their customers get more sophisticated and
demand even more. Banking is an area where we will see change relatively
quickly, so I am not too worried.
7. In the last two
years, the government has moved against the Trade Bank of Iraq (TBI) and
currently the Central Bank of Iraq (CBI) charging their directors with
corruption. Are you concerned about these cases?
As a foreign investor one is always concerned to see what
might be political interference in independent institutions. However, in my
experience the Iraqi judicial system is relatively robust and I would have
faith in it to deal with the issues of TBI and CBI.
8. Iraq also does not
offer sovereign guarantees where the government would be responsible if a
business defaults in a deal. How big is that in financing major development
projects?
This is a major issue that is certainly holding back
development in areas such as housing or independent power projects. Let’s be
clear that a sovereign guarantee does not make the government responsible if a
private business defaults on an obligation. A sovereign guarantee is an
irrevocable commitment by the state to pay for something. For that reason a
sovereign guarantee is considered indebtedness of the state and under the Iraqi
constitution any indebtedness must be approved by the legislature. As I
understand it, this is one of the main reasons that Iraq has not been able to
offer such guarantees, because the government is unwilling or unable to get
parliamentary approval.
9. Iraq still has a
state-run economy, but there is talk every year about diversifying. Have you
seen any moves in that direction or is Baghdad just using all its oil revenue
to increase the government’s role?
The transition from state control to a free market is taking
place albeit slowly. It will probably take a generation or more to complete.
Actually the recent decision by the government to stop giving every family a
basket of food every month, and replace it with a cash payment was an important
step in the right direction. The Government of Iraq is one of the largest
purchasers in the world of bulk commodities such as wheat, rice, tea, and
sugar. This is pointless, and an open invitation for corruption. Much better to
put cash directly in the hands of the people, and let the private sector take
over importing and selling commodities. This could even serve to jumpstart the
banking sector, since there are only about 700 bank branches, but nearly 17,000
ration distribution centers in the country. It is a great opportunity to
introduce leapfrogging technologies such as smart cards or mobile payments.
Unfortunately, the government botched the announcement, and scared people that
their rations were being taken away, so the decision has been rescinded for the
time being.
10. Iraq has 260
state-run enterprises that have struggled for years from out of date technology
and business practices, over staffing, etc. Recently there has been talk that
foreign firms are interested in investing in joint ventures with them. Are
those public companies really attracting a lot of attention, and is there a
chance to really turn them around, and make them successful?
Yes, there are some companies that have a chance to survive
in a free market. What Iraq has lacked for over 20 years is capital, technology
and skills. The government understands that foreign investors can bring all
three of these vital inputs. However, the government must recognize that
investors need to make a return that is commensurate with the risks and
difficulties of doing business in Iraq. Some of the companies will survive if
the government is realistic about the terms it offers foreign investors. Others
probably wouldn’t survive under any terms. After all how could Iraq possibly
make bicycles cheaper or more efficiently than countries in Asia with long
experience and huge internal markets? And why bother? There are plenty of other industries that
Iraq can develop using its abundant energy, water, and human resources.
11. What do you see
as the future for Iraq’s economy?
I see the
fastest growing economy in the world for the next few years. An economy that
will become increasingly sophisticated, and Iraq regaining its rightful place
as an important player in the international commercial and financial system.
SOURCES
Aswat al-Iraq, “Turkish company to rehabilitate iron and
steel factories in Basra,” 11/19/12
Dunia
Frontier Consultants, “2011 Year in Review, Foreign Commercial Activity in Iraq,”
March 2012
Iraq Business News, “Details of New Basra Logistics City,”
6/27/11
Kami, Aseel, “Iraq industrial sector attracts growing
investment,” Reuters, 11/19/12
World
Bank, “Doing Business in the Arab World 2012,” 2012
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