• Hard to Swallow: Optimism on Iraq Investment

    August 16, 2011

    Tags: , , , ,
    Posted in: Embassy/State, Iraq, Other Ideas

    Well, the Bachmann picture is just a metaphor, OK?

    The State Department held an Iraq investment conference in early June, a forum for the Secretary herself to strong-arm US companies into investing in the US government’s investment in Iraq. Say what you want, folks at State are optimists. Here’s the take from June:

    While businesses entering the Iraqi market continue to face hurdles, including a greatly improved but still difficult security environment, some positive developments, such as rising oil revenues, expected double-digit domestic economic growth, significant investments in infrastructure, and a stable democratic government point to the conclusion that Iraq represents a unique business opportunity.



    So, some 10 weeks later, let’s have another look at investment in Iraq.

    Security

    Security just keeps on sucking the air out of any investment plans. Just yesterday a string of coordinated bombings across Iraq killed 80 people, injured 250 and showed the bad guys, whoever they are, retain the ability to strike as they wish. The number of civilians killed by violence in Iraq rose to 159 in July from 155 in June, matching January with the highest toll so far for 2011.

    It is unclear if these attacks are designed to encourage American forces to stay or leave, but people do keep dying. Worse than a falling Dow for encouraging foreign investment.

    Oil Exports

    Oil exports, which were to drive the economy in Iraq, dropped in July compared to June (2.16 million barrels a day versus 2.75 million). Oil prices rose, so in dollar terms Iraq still did OK, but the oft-promised increases in output show no signs of coming true. Any drop in worldwide oil prices will whack Iraq hard upside the head as their output levels seems stuck.

    Infrastructure

    As for that developing infrastructure, well, that’s also part of the problem. Demand for electricity is still very high, high enough in fact to divert some of Iraq’s crude production to meet growing local demand for fuel to drive power plants. Kind of like borrowing from Peter to pay Paul.

    Bureaucracy

    In addition to the show stoppers above, investment in Iraq seems to run into bureaucratic hurdles.

    Basra is the focus for most of the West, because of oil, oil and oil. Unfortunately, while many projects are announced, fewer are implemented. According to head of investment in Basra, Haider Ali Fadel, while reports indicate that the investment authority agreed to the implementation of 40 projects since its founding in 2008, more than half have not been implemented.

    Fadel cited the lack of land allocated for the implementation of investment projects as the major problem (foreign companies cannot own land in Iraq, and the ever-so-slow Ministry of Oil controls most real estate in Basra). Somehow obtaining visas for foreign investors to enter Iraq remains a major challenge as well. The latter problem is related to corruption, poor relations between the Ministries of the Interior and Foreign Affairs, just bad communications or all of the above, depending on who you speak with.

    Local-Central Coordination

    What might be called other “coordination” problems between local and Baghdad bureaucrats also seem to be thwarting investment. In April, Iraq awarded the China National Machinery Equipment Import & Export Corporation a $204.4 million contract to build a 500 megawatt electrical power plant in Basra.

    However, the head of the electricity committee in Basra province, Ziad Fadhel Ali, said that “the electricity ministry did not signthe final contract, and we don’t know the reason for the delay. Since the signing of the initial agreement, the company has not taken any step towards implementing the contract because of the obstruction of the electricity ministry,” Ali said. Baghdad authorities blamed a failed financial guarantee from a Korean bank.

    Such problems are not limited to Basra. On July 2, Canadian company Capgent signed a $1.66 billion contract with Iraq’s electricity ministry to build 10 power plants over a period of 12 months. Four days later, Baghdad signed a $625 million contract with German firm MBH to build five power stations in 11 months. But Deputy Prime Minister for Energy Hussein al-Shahristani told a news conference that Capgent was “a company on paper only” and MBH was bankrupt and facing legal trouble. “The contracts with the phantom and bankrupt companies have been cancelled and lawsuits filed against them,” Shahristani said.

    Contracting Problems

    The construction contracting business, needed to actually build those investments that get past the bureaucrats, remains a problem as well. Iraq Business News reports that changes in legislation have led to an explosion in cheesy building companies.

    In 2003, the US’ Coalition Provisional Authority made changes to the existing Company Law No. 21 of 1997 because, as then-CPA head Paul Bremer wrote, “some of the rules concerning company formation and investment under the prior regime no longer serve a relevant social or economic purpose, and that such rules hinder economic growth.”

    Bremers’ amendments were supposed to liberalize the economy but had unintended consequences. Within a fairly short period, 925 construction companies registered in Basra alone with another 5000 waiting for registration.

    The growth in numbers allowed for the creation of companies that only existed on paper. The amendments allowed any Iraqi with a minimum of one million dinars (around US$850) to register a company. While the law does not allow a company to implement projects with costs three times more than its capital, any company can temporarily increase its capital by utilising a temporary deposit from one of the local banks. The bank deposits the needed amount, charges a commission and then withdraws the cash from the company’s account after the deal is signed. A foreign investor would be none the wiser.

    Hard to Swallow

    Investment in Iraq remains hard to swallow. We’ll check back again in a few weeks for an update. Until then, save your money.



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  • Recent Comments

    • Frederick Fellow said...

      1

      OMG! That is funny. That is really, really, really funny! Let’s face it. When it comes to power and politics, it’s all pornography. And this photo proves it!

      06/17/12 2:34 AM | Comment Link

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