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.
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