Slim pickings for Iraq's neighbours

Amman-based financial services company Atlas Investment opens a representative office in Baghdad.

WITHIN WEEKS OF the formal declaration that US-led coalition forces had successfully completed the invasion of Iraq, Amman-based financial services company Atlas Investment had opened a representative office in Baghdad.

The Jordanian company is one of a small number of Arab firms that are looking to catch some crumbs from the contractual table at which giant US corporations have feasted. These latter are headed by Bechtel, the prime contractor for rebuilding Iraq; and Halliburton, the oil services group whose CEO was once US vice-president Dick Cheney, which has won the contract for oil-field reconstruction.

There is little confidence in the Gulf that Arab contractors will win much business. In many cases they are simply not large enough to compete on their own and, as one banker notes: "Most of the regional contractors are too proud to set up consortia with rivals to win business."

But there are opportunities where they can offer specific expertise. Among the other companies to have found a niche in post-invasion Iraq are two internationally successful Jordanian firms. These are pharmaceuticals company Hikma, which has a long track record of matching leading western firms in this sector, and mail delivery operation Aramex, which was among the first foreign businesses to start up in Baghdad.

Some Arab fund managers, in Dubai and Kuwait, have been looking at the opportunities that would spring from an early involvement in the local companies that will ultimately be responsible for driving the new Iraq economy. For example, Kuwait-based investment bank Global Investment House plans to launch a KD60 million ($180 million) holding company to invest in Iraq.

"The Iraq Holding Company (IHC) will be making equity investments in well-understood and low-risk private sectors like banking, consumer finance, housing finance, telecommunications, education, healthcare, entertainment, light industries, transport, and logistics," says Omar El-Quqa, executive vice-president for corporate finance and treasury at Global Investment.

He says that IHC will benefit from its early entry. "We can use this time for recruiting local Iraqis, implementing the IHC's business plan, carrying out market and investment appraisals and then implementing them in due course," says Quqa.

If security can be restored to the country, one problem for such a fund could be the very attractiveness of Iraq to investors seeking companies whose value has hit rock bottom and can only increase as it re-engages with the global economy. Investors are also eyeing privatization opportunities.

This has led to widespread scepticism among Iraqis, who fear that their national assets will be sold off to US and British companies for virtually nothing. Thomas Foley, president George W Bush's former fund raiser, who is charged with reviving the Iraqi business sector, will, say bankers, find it difficult to persuade Iraqis that the only way to revive the monolithic state industrial system is through privatization.

The feeling that companies are severely undervalued at present will also delay the opening up of the stock exchange to foreign investors. "If the funds like IHC are looking to invest in shareholding companies, they will be taking a high risk. We have been in contact with those responsible for the Baghdad Stock Exchange and one of their senior executives says he will not allow in any non-Iraqi investors for at least another year," says Tariq Rabadi, Iraq analyst at Atlas Investment.

Companies from other Gulf states are also looking for a share of the reconstruction action in specific sectors. The most important thing for many of them, though, is that the wider Middle East economy has survived the war relatively unscathed. Regional tourism was hit - though it is recovering rapidly - and the shortfall in European visitors was offset by an increase in Arab ones. Some major projects were delayed and there were stories of some banks reducing credit lines to Arab institutions. But the long build-up to the invasion and the speed with which the Iraqi regime collapsed ensured that the Gulf economies, boosted by continued higher-than-expected oil prices, have continued to perform well.

Iraq's reconstruction will provide some business for regional companies though their initial hope that it would offer a contractual eldorado have been replaced with a more realistic assessment.

Mike de Graffenried, managing director of Saudi American Bank (Samba), says: "Some of our customers are involved in supplying materials for work that has already started. There is room for regional companies to get involved in areas such as trucking and materials supply, such as air-conditioning."

Arab bankers say that regional companies will benefit in the longer term when they start to make use of specialist skills, such as knowledge of the language, the culture and regional business attitudes, where they have a competitive advantage.

For example, it is now essential, says Rabadi, for a company's managers to turn up in Baghdad to show that they are serious about doing business in Iraq. Extensive information can be found on official websites - this is the first internet-led post-war reconstruction - but it is not enough to express interest from a hotel in Amman.

Arab executives will find it easier to get to Baghdad and do business there than their non-Arab rivals. One banker related the story of how a western contractor had been told he would only have a chance of winning a contract if he went to Baghdad. "How do I do that," he complained, "when there are no flights to the city."

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Another advantage for regional businessmen is in dealing with Iraqi nationals at government departments. "If you deal with the government, the top people are American, but they seem to change every three months. To make long-term contacts, you have to go down a level to the senior Iraqis, who will probably still be there in a few years' time," says Rabadi.

Despite these opportunities, there is a growing feeling among Arab companies that they have not been given a fair crack of whip by the US-led coalition provisional authority, which effectively controls every aspect of the economy including the award of contracts.