Thursday, July 15, 2010

Basra Represents Iraq’s Problems In Attracting Foreign Investment

At the end of June 2010 Basra held an international trade fair. 150 companies participated from Turkey, Germany, and Iraq. The event was portrayed as a success due to the number of businesses that were involved, but nothing was said about whether any companies actually decided to invest in the province. In fact, Basra has attracted very few foreign firms so far.

In 2009 Basra’s new provincial council passed its investment plan. The idea was to attract foreign companies to its industry, services, tourism, agriculture, and housing. The council was hoping for joint ventures with state-run industries in iron, steel, petrochemicals, fertilizers, paper, and cement. So far, no businesses have invested in the governorate outside of its oil sector. The main reason is that the state-run businesses employ a huge number of useless workers, which foreigners are unwilling to pay for. The general manager of the state-run Iron and Steel Company in Basra for example, said that they had gotten some initial interest from Italy and South Korea, but the talks failed because they were unwilling to pay for the company’s excess labor. The business has 6,300 registered workers, many of which lack any actual experience or skill in their trade. Most of those were appointed by political parties looking to create patronage systems by giving people government jobs in return for their support. Another instance was the Basra steel plant. An Italian company was interested in the firm, but disagreed with the local authorities about how many workers it was willing to pay for. The government also failed to provide any specifics on how the investment and production deal would work.

Basra’s experience with foreign companies is an example of the country’s overall problems in attracting outside investment. Iraq’s investment laws are confusing, contradictory, and prohibit foreigners from owning land except when building houses. Iraq also has a state-run economy, so international businesses are asked to form joint ventures with government owned Iraqi companies. The problem is that these are old and unattractive because of their lack of productivity and their huge workforces, which have been forced upon them by politicians. Finally, the Iraqi government has no real commitment to economic reform. There’s plenty of talk about privatization, and the free market right now, but it is largely just rhetoric. Everything continues to rely upon the government, there’s lots of opposition to capitalism, and many officials are afraid of the economic and political consequences of getting rid of state employees. Until those things change, most foreigners will stay away from anything but Iraq’s energy industry.

SOURCES

A.A.I.B. Insurance Brokers, “Companies Seeking Investment Prospects in Basra,” AAIB View, 6/29/10

Abbas, Mohammed, “Iraq aims to allow foreign investors to own land,” Reuters, 5/25/09

Al-Ansary, Khalid, “Iraq investors bemoan red tape and lack of credit,” Reuters, 3/29/09

Aswat al-Iraq, “100 firms take part int’l trade fair in Basra Friday,” 6/24/10

Daood, Mayada, “what’s the plan? fears of renewed central control,” Niqash, 5/25/10

Desai, Raj, “Iraq’s Economy Needs More Than Security,” Brookings Institution, 10/23/09

Ibrahim, Waleed and Benham, Jason, “Iraq passes key investment law,” Reuters, 11/23/09

Levinson, Charles, “Leaders have vision of burgeoning Baghdad,” USA Today, 9/9/08

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 4/30/09

Al-Wazzan, Saleem, “investors steering clear,” Niqash, 6/28/10

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