Foreign investors flock to Iraq despite rising violence

Where others see carnage and chaos – June alone saw 155 civilians killed in attacks – business people see a big oil-earning economy.

iraq bomb 311 (photo credit: REUTERS)
iraq bomb 311
(photo credit: REUTERS)
It was just another day in Iraq on July 15.
In the city of Kerbaba; two car bombs killed a total of seven people and wounded 19. An American solider was killed in Baghdad while in another part of the capital an Iraqi policeman was injured by a sticky bomb placed under a vehicle. More bombs wounded soldiers in Samarra and in Mosul. 
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But July 15 also saw the grand re-opening Baghdad's renowned Al-Rasheed Hotel after a $65 million renovation. Britain’s Harlow International undertook the construction work while Holland’s Kempinski Hotel group will manage it.
"The rebuilding of infrastructure, including palaces and airports, is evidence of the ability of Iraqis to achieve what they want,” Foreign Minister Hoshyar Zebari said at the ribbon-cutting ceremony.
Even as Iraq suffers an upsurge of violence – June alone saw 155 civilians killed in attacks, the most since January – foreign investors are flocking to the country. Dunia Frontier Consultants, a Washington DC-based consulting firm, estimates that foreigners were responsible for $45.6 billion in investments, service contracts and other business in Iraq in the first half of the year. That was double the amount the same time in 2010.
Where others see carnage, chaos and corruption, investors see a potentially oil-rich economy whose population of some 30 million is desperate for housing, roads, consumer products and services.
“What you have is a country that produces oil, which makes it very attractive for the hydrocarbon industry to invest there. It’s a country with a very large population,” Daniel Broby, chief investment officer at London’s Silk Invest, told The Media Line. “The middle class suffered a lot of problems but they are educated and there is a lot of home ownership, so banking and telecommunications industries are very attractive for foreign investment.”
Driven by high energy prices, Iraq’s economy will grow 12.5% this year, according to the International Monetary Fund. Iraq’s Oil Ministry said in June alone petroleum brought in $7.17 billion as exports averaged 2.273 million barrels a day at an average price of more than $105 a barrel.
With the government’s coffers swelling, Planning Minister Ali Al-Shukri told Reuters on Monday Iraq is looking to raise its 2012 investment budget by 50% to as much as 60 trillion Iraqi dinars ($51 billion).  
Iraq’s oil and gas sector drives the Iraqi economy, but residential real estate is the biggest target for foreign investors. According to the Dunia report, it accounted for a third of all foreign commercial activity last year. Iraq has a shortfall of 1.6 million homes. Transportation infrastructure was next followed by electricity and manufacturing.
“A lot of the money going in is going into things as a result of the Iraq’s oil business,” said the editor of Iraq Business News, a portal dedicated to keeping foreigners abreast of business in the country. The site was launched in February 2010 and since then the number of subscribers to its weekly newsletter has jumped to 90,000 from 3,000.
“The bulk of the deals announced are in real estate,” he told The Media Line, speaking on condition of anonymity. “So much needs to be done there in terms of infrastructure. The government plans to build one million homes financed by oil revenues … Then you’ve got other stuff related to that, shopping malls and so on.”
The revival of the Al-Rasheed is only one example of how Iraq is turning into an investment magnet – and how investors have to take special precautions to make sure their business ventures literally don’t blow up in their faces.
In Al-Rasheed’s case, the hotel is situated in the Green Zone, an area that once served as the US military’s Baghdad headquarters and is now favored by foreign business people and other visitors because it is cordoned off by concrete walls to protect it against attacks.
Business people coming to Iraq have to take unusual measures to ensure their personal safety and that of their property.
Businesses that can keep assets out of Iraq usually do, although the government is trying to bring an end to the practice, say investment advisers. One company with a franchise to import vehicles, keep the cars parked in a lot in neighboring Kuwait and deliver them to its Iraqi customers once the price is paid in cash. Except for relatively peaceful Kurdistan, a semi-autonomous region in the north, even a single expatriate will travel in a convoy of three or four vehicles.
“Security costs are a major deterrent,” T. Keyzom Ngodup, executive director of Ideas sYnergy, an Iraq-based consulting company, told The Media Line. “An organization or project that has maybe 14-20 expats in a quarantined compound may have security costs of about $300,000 per month.”
The World Bank says Iraq is one of the world’s worst countries to do business. It ranked Iraq 166th out of 183 economies for “ease of doing business,” an assessment that includes dealing with construction permits, protecting investors, enforcing contracts and registering a property. It ranks 175th out of 178 for corruption.
And Iraq’s chronic violence may yet push it off the business cliff. General Lloyd Austin, the top US military commander in Iraq said earlier this month, the failure to curb bombings and attacks by militia groups and insurgents in Iraq could spark a flight of foreign investment. The US is now schedule to remove the last of its forces by the end of the year. 
"These violent criminal elements if left unchecked will create an environment that forces foreign investors to pull out of the country .... Violence and economic prosperity cannot co-exist," Austin said.
But the opening of the Al-Rasheed is also an example of how for now at least the wheels of business are gradually starting to turn in Iraq.
Airlines have begun flying to the country – a prerequisite for hotel development – both by Middle East-based carriers such as Emirates, Etihad and Qatar Airways as well as those outside the region, such as Austrian Airlines and Lufthansa. As a result, hotel chains such as Rotana, Safir, Best Western, Swiss-Belhotel International and Millennium & Copthorne are coming to Iraq. Global chains have signaled they will be following.
Strangely enough, the US has been slow to pick up on the new-found interest in Iraq, even though its forces led the coalition that toppled Saddam Hussein. Last year, it accounted for just 4.7% of all foreign commercial activity in Iraq, behind Turkey, Italy, France and South Korea.
Ngodup said the US lost its “first-mover advantage” by failing to give enough support to visiting executives. There is no American-Iraqi Chamber of Commerce and other countries provide more consular support. Another deterrent is the country’s fearsome reputation for violence, said the editor of Iraq Business News.
Turkey, the No. 1 investor, in Iraq, has focused on relatively tranquil Kurdistan, but it has gradually started to move south into the rest of Iraq, especially as the southern port of Basra has become an investment epicenter.
“You have to be comfortable with the risk and in that respect the Turks are comfortable,” said Silk Invest’s Brody. “They are much closer geographically.”