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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.
Investment initiatives 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.
Prospects for regional companies 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.”
Cultural advantages
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Telecoms infrastructure: the repair and |
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.
Arab companies look as if they will lose out in one area, mobile telecommunications, which is a sector where they are of sufficient size to win the business and have experience of setting up Middle Eastern mobile networks rapidly from scratch. Indeed Batelco of Bahrain and MTC from Kuwait were able to launch unlicensed services from Baghdad in the aftermath of the war, but decided to close them within days after warnings from the provisional authority that they were breaking the law.
Arab companies will find it much harder to win what is expected to be one of the most lucrative contracts to be awarded in post-war Iraq because of the way the contracts have been structured.
The decision to limit the involvement of companies in which governments hold more than a 5% stake effectively rules out most telecommunications firms in the Arab world. Although the private sector has an increasingly dominant position in both mobile and terrestrial service providers, governments still hold stakes in most companies.
It remains to be seen if Arab telecoms can find a way round this stipulation by forming a consortium that can then bid for what are expected to be three licences covering north, central and southern Iraq. These licences will last for between 18 months and two years.
Nonetheless there is a feeling that the competition in this – as in other areas – is not going to be fair. With T-mobile and Orange, Europe’s second- and third-largest operators, also having government shareholders, the advantage lies with such US and British firms as Vodafone and MCI (formerly WorldCom), which provides a mobile network to the US forces in Iraq.
Arab suspicions that this contract is being designed to benefit US firms would be reinforced were the administration to decide to use the CDMA standard being developed in the US. Economic and practical logic would suggest using the GSM standard, which is currently used by the MCI service to the US forces in Iraq and is used in most of the Middle East and Europe. If the CDMA system were implemented Iraqis would be forced to buy a second phone for use outside Iraq.
Banking opportunities Another area where Arab institutions have the expertise to play a significant role is in the revival of the banking system. Two Jordanian banks, Jordan-Kuwait Bank and Export & Finance Bank, have dipped their toes in the water by starting to do business with Iraqi Credit Bank and the Bank of Baghdad respectively.
But these are only small institutions and the real focus is on the fate of the two largest state-owned institutions, Rasheed Bank and Rafidain Bank, which account for more than 80% of the financial sector. Rafidain Bank is by far the largest, with more than $1 billion in deposits.
Restructuring these banks is the first task in rebuilding the financial sector so that it
can offer international standards of technology, competition and services. That inevitably means the involvement of international banks, and the administration has opened negotiations with such institutions as HSBC and JPMorgan Chase.
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An uneasy peace: attacks on road transport |
Absence of security Peter McPherson, director of economic development for the coalition provisional authority, has said publicly that he is keen that international banks open for business in Baghdad and the authority wants them to bid for the contracts to restructure leading Iraqi banks.
Many of the details have yet to be worked out but there is no doubt that the administration wants an immediate turnround in the management structure of the banks. International banks, which may be allowed to take equity positions, have been asked to put forward detailed proposals for a new business strategy, devise an approach for expanding the loan business to small and medium-size companies, develop a reliable private deposit base and create a consumer credit market.
However, a smoothly functioning financial sector will remain a long-term dream so long as day-to-day survival remains the priority and while there are so many questions about economic and financial stability. US soldiers continue to be killed almost daily even though the war is formally over. Civilian contractors are also vulnerable. In early August, an employee of Halliburton became the first US government contractor to be killed in Iraq when the truck he was riding in struck an anti-tank mine in the northern city of Tikrit. The bomb attack on the UN headquarters in Baghdad which killed 24 people on August 19, coming after sabotage attacks on oil and water pipelines, shows a security situation getting worse not better.
This all delays the introduction of reliable and adequate electricity and water supplies, a process that is also hampered by an apparent lack of coherent strategy from the administration.
On top of this there are short- and medium-term financial problems.
Unemployment is estimated to be 38% and the currency is extremely volatile. Its value can move dramatically up and down against the dollar – sometimes by as much as 40%. The Central Bank of Iraq, whose reserves were plundered by the fleeing Saddam Hussein, does not have the financial resources to intervene effectively in the market.
A further short-term difficulty will be control of inflation as prices and wages come more into line with international standards. Iraqis were paid extremely low wages by Saddam but he balanced this with state subsidies on consumer goods. There is a risk of hyperinflation as wages and prices now chase each other upwards.
The key long-term question is what will happen to Iraq’s long term debt which, if all obligations are included, totals more than $500 billion. With a GDP currently estimated at $25 billion last year likely to fall to $15 billion this year, Iraq has no chance of servicing this debt.
The international community will decide later this year whether, for example, there will be any forgiveness or restructuring of the more than $150 billion in bilateral and commercial loans, mainly from Paris Club countries. There is unlikely to be great pressure for repayment of the $150 billion plus loans from the IMF and World Bank. Decisions, though, will have to be taken on whether and at what speed to collect the estimated $200 billion in war reparations.
Iraq will have a chance to rebuild – it is estimated that reconstruction will cost $54 billion – if the provisional authority or a successor Iraqi government can reach an agreement with its creditors and negotiate more financial investment.
Iraq has a number of strengths. With the second-largest oil reserves in the Middle East, it can earn $18 billion a year from oil production. It has a well-educated population and a diaspora that has 30 years’ experience of business and finance. But there is still a very long way to go – GDP this year will be only 15% of what it was after the first oil-price boom in the late 1970s.
