Can Iraq Realise Its Potential?
At the end of April, Risk Watchdog went to the ‘Invest Iraq’ conference in London. It was attended by several hundred representatives from a broad range of companies, and a large chunk of the Iraqi government, including Prime Minister Nouri al-Maliki (who gave the keynote speech), was there. The delegates were very ‘on message’ and bullish about prospects for foreign investors, as one might imagine. After all, it was very much an advert for the country, and the government is well aware that foreign capital and skills will be required in abundance for Iraq to realise its economic potential.
And it does have a lot of potential. First off, Iraq’s enormous oil (and gas) reserves will be sure to attract foreign companies over the coming years. But the Iraqi delegation was keen to attract foreign investment into a number of other sectors: after years of underinvestment, Iraq’s infrastructure is in desperate need of upgrading; the financial services sector is primitive to say the least; and Iraq suffers from a severe housing shortage (officials at the conference claimed that over the next 5-10 years, there will be demand for an additional 3 million housing units). With all these sectors open for investment, why wouldn’t foreign companies be keen to pile into Iraq? Especially as the global recession is no doubt causing many of them to shelve investment plans in their home countries. At the conference I got a feel for some key investor concerns.
Security: The security situation, unsurprisingly, remains a major consideration. Security has improved over the past two years, but Iraq is still a dangerous place. Even if companies were keen to send in foreign workers, in many cases this is still precluded by prohibitively expensive insurance premiums. Moreover, many attendees did not seem to realise quite how diverse the security risks were across the country. While security risks certainly remain high in central Iraq, Kurdistan is at peace, and the Shi’a south is largely violence-free.
Financing: No investor is going to go into Iraq unless they are confident of getting paid (obviously). Consequently, the shallowness of the domestic financial services sector is perhaps a bigger problem than security over the longer term. Financing challenges abound. For example, in Iraq, housing banks or mortgages do not yet exist, so even though the government is keen to encourage investment from foreign property developers to help remedy the housing shortage, these investors will no doubt have reservations. As another example, the underdeveloped banking system means that many Iraqi would-be importers may struggle to secure trade finance, without which potential export partners are just not going to be interested.
Governance: Corruption in Iraq is high. This is not necessarily a hindrance to a country’s development, at least in the early stages – a little bit of corruption can grease the wheels of commerce, so to speak. Perhaps what is more frustrating to investors is bureaucratic inertia. Here’s an example: one attendee at the conference related how his company had, over the past two and a half years, invested tens of millions of dollars into constructing a five-star hotel in Karbala – a major destination for religious tourism. The hotel is almost finished, but he hasn’t yet obtained planning permission from the local government (he first applied for permission before the first foundations were dug). Institutional infighting, competing local vested interests, and an inefficient bureaucracy all mean that foreign investors will surely have to be prepared to be patient.