Open for business

Government projections of population growth in Iraq, which run at 2.6% annually, lead it to believe that almost two million housing units will be needed by 2015.

As efforts at reconstruction have created demand for construction expertise and the money needed to pay for it, the
construction and building material industries have become ripe for investment.

In short, Iraq needs everything. Even the humble brick is in short supply, with the government estimating demand exceeds local supply fourfold. While Iraq’s domestic construction sector is growing, the government does not feel it has the capacity to cope with the expected demand, which is driven by greater stability, returning refugees and a general trend toward urbanisation.

While significant sums have been set aside for reconstruction and infrastructure development – US $16 billion in the 2009 budget – the government has acknowledged that public financing will not be enough.

A recent overview of the housing and construction market, published by the government said: “Private capital and expertise will be needed to build and sustain the huge infrastructure investment needed. In housing, for example, the government expects that up to 85% of home building will be carried out by the private sector.”

Key opportunities exist in the building materials sector, construction and housing. According to the government investment licenses have been approved for $2 billion from a total of 40 projects.

The Iraqi government also claims that a UAE developer has signed on to work on a $5 billion project, which is intended to include a hospital, apartments and shopping malls, all within the former Rashid Military base in Baghdad.

The government also seems keen to push the idea of local partnerships. It is at pains to emphasise that what local developers lack in knowledge of current techniques, they make up for in their understanding of the legal and regulatory structure.

This inside knowledge could prove invaluable, as doing business in Iraq can be costly, frustrating and difficult. For the first time in many years, however, the opportunity is so great that it easily outweighs the pitfalls, as many first-movers from the international and Gulf region are finding.

To open the lid on the business environment in Iraq, Construction Week tracked down Baghdad residents John Desrocher, minister counsellor for economic coordination, US State Department, and Gary Soper, first secretary, head of UK Trade and Investment, Iraq.

“Iraq is very keen to see more companies establish operations there, but also to broaden that whole dialogue to include trade as well,” explains Soper.

However, getting your investments off the ground in Iraq will be an uphill task. “This is a country which is essentially rejoining the world economy for the first time in decades,” says Desrocher.

For small and medium size enterprises Iraq remains a small but growing opportunity landscape. For the time being the biggest rewards are there for the larger companies, which carry the clout of global support with them.

Breaking into to Iraqi markets also represents challenges quite beyond those of the rest of the region. “It’s important to bear in mind that the private sector is still small in Iraq.

Over 43% of the working population is employed by the government or state owned enterprises, so there isn’t the same dynamism in private hands that you find elsewhere,” explains Soper.
 

“However, it’s still early days and there is a very steep learning curve under way.”

A further consideration is that a great deal of international work is predominantly handled by the ministries. SME’s might not have the level of financial backing required to stay in for the long haul currently required.

In terms of getting started, both Desrocher and Soper agree that your home country’s embassy is the best place to go. Following that step, the National Investment Commission, which was established in 2006, is the next port of call.

The NIC, led by its chairman Sami Al-Araji, is the face of private investment in Iraq, with a mission to serve as promoter, facilitator, monitor and policy advisor for firms looking to invest in Iraq.

“The NIC can help companies clear all the challenges which are out there. They work very hard promoting investment,” says Desrocher.

Whilst a number of agencies have sprung up focused on specific industries, in theory to streamline processes and procedures, but it is not always clear where the lines of demarcation between them lie, and vested interests still have a habit of coming to the fore. Clearly not a market for the feint hearted, but things are improving.

Government ministries don’t have the pedigree of making important decisions. The ingrained system is that everything goes up to the highest level.

“There have been instances of $40,000 projects which aren’t signed off because trade and development contracts do not have a framework in place. There is a tendency to send everything towards the prime minister’s office for authorisation,” says Soper.

For companies looking to set up in Iraq and finding office space in the International Zone (formerly the Green Zone), the consensus is be prepared to progress slowly.

“There are companies on the ground in the International Zone which have facilities for rent – either for flying visits, kitted out as a standard board room, as well as temporary office units,” explains Soper.

For long-term partnerships the model appears to be that once companies have the confidence to set up a local joint venture that will facilitate moving out of the International Zone.

The market is clearly not one for the feint hearted, and much ground work must be laid before embarking on your business plan. Rich pickings won’t come quickly, and finding a suitable JV partner looks to be the best vehicle for medium-term penetration.

For the firms that successfully crack the major projects, the rewards are unparalleled in the coming decade.

Growing cement supplies
The Ministry of Industry and Minerals has been encouraging the licensing of new cement producers, as well as private public partnerships to rehabilitate major state-run cement factories.

Lafarge, a building materials company, has taken advantage of the opportunity represented by Iraq and has built two plants in the country whose total capacity now reaches one quarter of domestic Iraqi production.