Building Iraq’s Infrastructure

Foundations of a Fledgling Economy

The Iraqi Council of Ministers will soon debate a law prioritizing infrastructure investments over the coming years. These investments – totaling as much as $70 billion – are considered critical to Iraq’s broader economic development, and they present significant opportunities outside the hydrocarbon sector for foreign investors. Yet, with a strained budget, persistent flare-ups of violence, and a fragile political order, will the government be able to successfully undertake such a massive endeavor? If so, which sectors will be deemed the highest priorities? Iraq will need international firms’ expertise in order to carry out large-scale projects – what terms, rights, and incentives will foreign investors and partners be granted under this law? Which infrastructure opportunities are the most attractive?

Insights from the Ergo Network

Ergo asked four experts to comment on the outlook and viability of private sector investment in infrastructure projects in Iraq.

• Expert 1: Former US Government senior economic advisor to Iraq and expert on institutional investments and corporate development

  “The Iraqi government may well continue to set goals that it does not fully achieve, especially in the realms of budget execution and infrastructure investment. However, ministerial capacity is improving, and significant funds are now being spent at both the federal and provincial levels. If only 50% of the $70 billion goal is achieved, this still represents a noteworthy opportunity for international firms in myriad industries.”

  “Iraq is a complex and sometimes difficult place for international companies to operate. This creates perceived barriers to entry that actually benefit those firms who set up operations here. By working with the right institutions, like the Trade Bank of Iraq, the National Investment Commission, and established security and life support providers, international firms can and are currently participating in infrastructure investment and other opportunities throughout Iraq. Water, electricity, transportation, government consulting, logistics, and of course oil services, are all attractive prospects for firms willing to take the extra time and effort required to succeed in Iraq.”

• Expert 2: Prominent Iraqi entrepreneur active in business ventures in the Kurdistan Region, Baghdad, and Basra

  “You know the Iraqi government, they are always talking, talking, talking…and they don’t build anything. Look at the GE deal, for example, the $3 billion order of turbines. They were not able to do even this very important project with a major, reputable international company.”

  “There are good investment opportunities throughout all infrastructure. It is open. But the Iraqi government, it is very hard for them to award contracts to anyone. Sometimes the fewer people you deal with, the easier it is. Take the KRG [Kurdistan Regional Government]. We have been approached by someone who is planning to do an elevated highway between Zakho and Erbil, a French company came to do the research and is planning to do this. But most of the projects with the KRG, I would prefer to discuss them after the new prime minister comes in, same thing with the rest of Iraq as well. It depends a lot on the relationships you have. I think right now you can get some guarantees from the KRG or the Iraqi government. For example I think you can push the government to give you guarantees from an outside bank. But I think you won’t get a concrete deal until after the next elections. If you come to them with outside financing, they will be more flexible. They don’t want to pay.”

• Expert 3: Baghdad legal expert advising private investors on Iraqi law since 2003 policy

  “Of course, Iraq has a great many infrastructure needs – but many of these immense projects will not get done. It is very important to look at the budget situation in this respect. Where does this $70 billion come from? It is not in the budget. For any infrastructure project you are considering, I would make sure there is a line item in the budget for it because otherwise there will likely be difficulty coming up with payment.”

  “In terms of incentives, the National Investment Commission is seeking to consolidate a lot of power over reconstruction with this plan, because they can approve or deny projects. Yes, the investment license offers some good terms like tax holidays and all that, but you don’t necessarily need an investment license. Look at the Mosul Dam project. Tax incentives must be approved by law, but I would expect other ministries to start offering non-tax incentives outside of the investment license as well.”

  “To be honest, the most attractive option for infrastructure is to apply for a soft loan under the development assistance program offered by the Japanese government. It is a much more secure transaction because you are dealing with a more reliable party for payment.”

• Expert 4: Managing Partner of investment firm focused on Iraq

  “There is a large market in housing construction. The Iraqi government has committed a significant percentage of this reconstruction money to housing, which is mostly likely to be high volume developments aimed at the broad middle- and lower-income markets. This kind of investment, along with electricity, is the kind of thing that creates political capital for Iraq’s politicians, and decision makers in the Iraqi government will be aware of this. You have to remember that historically the Iraqi state has been a welfare state, and it is still expected by many Iraqis to play this role.”

  “Sure, there is a budget problem now which is going to force some difficult decisions and maybe cause some problems with projects, but looking at the long term, persistent oil revenues will provide the government with enough income to support just this kind of initiative. Speaking of which, if they want to keep that oil revenue flowing, they are going to have to put some serious thought into investments in their oil infrastructure as well. The current system is pretty old and dilapidated. They are aware of the problem, but knowing the way the Iraqi government works they will probably not do much about it until they absolutely have to. But they are already losing out on oil income they could make from capacity upgrades, and they have committed to dramatic increases in oil production, which just aren’t going to happen unless they spend their money.”

Looking Ahead

Although the political environment is stabilizing, and the Iraqi government has made strides in its bureaucratic capacity, experts familiar with reconstruction in Iraq view the $70 billion infrastructure investment plan with skepticism. There is little track record of successful transactions between the government of Iraq and international private sector players. Nonetheless, significant opportunities in infrastructure are available for selective and prudent international partners:

• Because the Kurdistan region enjoys relatively greater stability and more streamlined decision-making, the bureaucracy related to infrastructure investments can be less onerous..

• The Iraqi government desires foreign participation in infrastructure investment but struggles to pay its bills. Experts suggest that projects that can be externally financed or guaranteed are the most likely to be realized.

The government of Iraq is entering into an increasingly precarious position. The security situation has improved dramatically over the past year, but Iraqis are growing frustrated with the government’s failure to put Iraq’s oil wealth to work in ways that will materially benefit the Iraqi public. In the face of mounting pressure to produce tangible results and sustained cash flow from oil revenues, the Iraqi government must establish both the institutional capacity to execute major infrastructure projects in partnership with multinational firms and the good faith in paying for them.

Significant progress on any such projects is highly unlikely until the January elections identify powerbrokers; after that, the focus will likely be on basic sectors that can pay high political dividends – electricity, water, and sewage, for example. Investments in these areas have the potential to be lucrative, but have the highest chance of success if they incorporate financing mechanisms not dependent on the Iraqi government.

Ergo’s extensive past performance on critical infrastructure and Iraq’s investment potential over the past several years enables us to provide hard-to-get insights on the most difficult and opaque Iraq-related questions. Our Baghdad presence and extensive network of in-country teams and experts position us to provide unique and actionable insights on any Iraq-related topic. For more information regarding our Iraq capabilities, please visit www.ergo.net/access-iraq.