Monday, April 14, 2014

Promise and Peril of Investing In Iraq, Interview with MENA Capitals’ Ali Albazzaz

Ali Albazzaz is a finance specialist focused on doing business in Iraq. He is a consultant working with MENA Capital, an investment company that focuses on the Middle East and North Africa, including Iraq.  That country has huge potential with its vast energy wealth along with huge needs after decades of wars and sanctions. This has attracted a wide variety of companies interested in developing its oil and gas sector along with rebuilding the nation in general. Unfortunately the rebirth of the insurgency might scare off foreign money. To discuss the promise and peril of Iraq is Ali Albazzaz.

1. Most of the talk about Iraq focuses upon the oil sector, but the country needs so much in terms of services and infrastructure that there are plenty of other opportunities. Outside of petroleum and gas what other sectors of the economy have attracted investment?

Housing and construction have received some foreign private investment, especially in the Kurdish region which has seen a plethora of housing developments, high-rise 5-star hotels, shopping malls and now Emaar's Downtown Erbil project. Unfortunately the picture in the rest of the country is not as rosy. There has been investment in hotels, some high profile housing projects have been signed or broken ground, and you can see visible signs of construction activity in Baghdad, where a few malls have now opened, but foreign investment is still limited in spite of Iraq's estimated 3 million housing unit shortfall.

The electricity sector has and will continue to receive a lot of investment. Whilst most of that has been from the Iraqi government, for engineering, procurement and construction contracts ($4.7bn for electricity projects in the 2014 budget), independent power producer projects (IPP) have been executed in the Kurdish region, and these are starting to be used in other parts of Iraq. The IEA estimated in 2012 that Iraq will need to build an additional 70 GW of generation capacity by 2035, so once IPP projects become entrenched outside the Kurdish region these will be a catalyst for further foreign investment of more substantial scale.

The shrine cities of Karbala and Najaf, which see millions of pilgrims per year, have seen a lot of investment in tourism related infrastructure, such as hotels, markets, shopping malls etc.

There has been some limited investment in industry (for example in building materials, steel), some investment in the telecoms sector (such as the three mobile operators that are largely owned by foreign telecommunications), and some investment in ports and logistics infrastructure.

2. Plenty of companies from the region such as Turkey and the Gulf states have gone into Iraq. Have there been as many companies from Europe, the U.S., and Asia doing business there?

There is a very significant presence of Asian companies. The Chinese, South Koreans, and to a lesser extent the Japanese, are active in the Oil and Gas, Construction, and Electricity sectors, among others. Iranian businesses are involved across a range of sectors, and like Turkey and the Gulf, are big exporters to Iraq. European and American firms are present, but nowhere near to the same extent as the countries above.

3. What issues do foreign companies face with Iraq’s banking sector and insurance?

Iraq's banking sector is still rudimentary but slowly improving. Foreign companies are able to use the better private banks to manage payments and payroll and for local foreign exchange operations. They do also provide Letters of Credit and Letters of Guarantee etc. The service levels of the state banks are so poor as to be effectively unusable, Trade Bank of Iraq being an exception. The biggest issue is the state of development of the banking sector. The balance sheets of most private banks are too small and they don’t have the skill set or appetite to participate in a meaningful way in anything beyond small projects. The entry of Standard Chartered Bank and Citibank is therefore much anticipated.

On the Insurance front foreign companies are able to get coverage but purchase it from outside of Iraq as the local market is not developed enough and does not have the depth even if it were [developed enough].

4. Iraq’s bureaucracy and corruption are rather infamous. What kinds of advice do you give to firms in dealing with those two issues?

With regard to bureaucracy, I recommend that firms work with the best local professional advisors, ideally those that operate in partnership with an international firm, and to choose an experienced, effective, and respected local partner. I also counsel them to set their expectations accordingly from the start of the process, and to be patient.

Corruption is rampant but firms do find ways of managing it in countries with similar levels of corruption and firms are able to conduct business in Iraq without resorting to it.

Some ministries and some local governments are better than others, so it’s important for firms and investors to be judicious about which counterparties they enter into agreements with. Firms can minimize the likelihood of rent-seeking behavior by enlisting the support of their national governments and engaging with Iraqi stakeholders (tribes, religious, civic groups) that may be of help.

With regard to internal graft and other illegal practices, firms need to put a lot of care in the recruitment and training of local management and staff, and be very clear about acceptable behavior. The major international audit firms are now operating in Iraq and are able to provide internal audit and assurance.

5. From 2003-2007 there was very little direct investment in Iraq. Then things took off in 2008 when the civil war ended. Now that the insurgency has been reborn and violence is taking off again in Iraq have you seen any change in foreign interest in the country?

The violence has dampened investor interest for projects in central, western, and northern Iraq - however some firms and investors are pushing ahead regardless, whilst many others have slowed down or suspended their plans (as opposed to cancelling them altogether).

It is not only the spike in violence that is of concern but also the governance issues and nature of Iraqi politics. The elections at the end of this month are unlikely to provide a quick resolution to these issues and there will probably be another protracted government formation period with increased violence in the interim, hence many firms are also waiting to see how the elections play out and what the repercussions are.

6. Kurdistan and southern Iraq are largely untouched by the current surge in violence. Do you think those areas will continue to see foreign businesses going there or will the fighting scare off companies in general from Iraq?

The Kurdish Region is not only unaffected but may be benefiting from further reinforcement of its stability and security compared to the rest of Iraq. I think businesses and investment will definitely keep going to that region, and will do so at an increasing rate.

Southern Iraq is being affected by the recent violence, but to a far lesser degree than the rest of the country. Foreign businesses will continue to be attracted, particularly because of the scale of ongoing investment in the oil and gas sector, the increase in provincial revenues and local incomes, its relative safety, and proximity to the Gulf.

Karbala and Najaf are also relatively more secure and have their own economic momentum which has not been greatly impacted.

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