Presented at the 8th Meeting of the Working Group on Infrastructure Finance in Iraq, MENA-OECD Investment Programme. 30 April 2013, Cairo, Egypt

1. Understanding Investment Patterns in Iraq
8th Meeting of the Working Group on Infrastructure Finance in Iraq
Cairo, Egypt
April 30, 2013
© Dunia Frontier Consultants 2013

2. Introduction
§
Iraq offers an interesting value proposition for international investors and
businesses. The country’s economic infrastructure has been destroyed by
more than 25 years of war and sanctions that began with the Iraq-Iran War
in 1980. Iraq needs hundreds of billions of dollars in foreign capital in
order to rebuild infrastructure and kick-start private sector growth. With
its rapidly growing, predominantly young population and vast
hydrocarbon resources, Iraq should experience near double-digit
economic growth for decades to come.
§
Central to the process of rebuilding Iraq is the need to reduce large scale
and widespread unemployment in a labor force of over 10 million.
Providing growth in labor-intensive economic sectors will be key.
§
Nevertheless, the process of securing, stabilizing and rebuilding Iraq has
been uneven to date. Growing confidence in the Iraqi government’s
ability to reduce violence and otherwise maintain stability has increased
foreign investment—but to date FDI flows appear to be modest and
heavily skewed towards hydrocarbons and lighter activities targeting the
Iraqi consumer market (such as sales and distribution).
§
However, reliable data on foreign direct investment in Iraq is extremely
limited, and one of the priorities of MENA-OECD Investment Programme
in Iraq is to have a good quality of data so as to better evaluate recent
developments and build future scenarios.
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3. Official Data on Foreign Direct Investment
UNCTAD
$2,000
World Bank
$1,856
$1,800
$1,617
$1,598
$1,600
$1,396
US$ (millions)
$1,400
$1,200
$1,000
$800
$623
$600
$400
$200
$0
2007
§
2008
2009
2010
2011
This is what the official data on FDI for Iraq looks like. A few observations:
•
The data is not very rich. While you can see progression from 2007 – 2011, these topline numbers do not give a nuanced view of the pattern of investment and
development in Iraq. There is little sense of geographic and/or sector distribution.
•
The data is not necessarily accurate. As seen in the chart, there are discrepancies
within the official numbers. Moreover, there may be discrepancies in the
methodology for recording flows, which create important gaps.
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4. Another Look at Official FDI Data
Partner country
Type of FDI
Currency
Year 2001
Reporting country
Australia
..
Belgium
..
Denmark
..
France
..
Germany
-6.269
Hungary
..
Italy
..
Japan
..
Korea
..
Norway
..
Sweden
-0.387
Turkey
0
2002
2003
2004
Iraq
Outward
US dollars, millions
2005
2006
2007
..
..
..
0
0
..
..
..
..
..
-0.206
0
0
..
..
0
0
0
0
..
..
..
-0.248
0
0
..
..
0
1.242
0
0
..
0
..
-0.272
0
0
..
0
2.486
0
0
0
0
..
..
-0.401
0
0
0
0
1.255
0
0
-8.786
..
0
..
-0.271
0
..
0
0
..
0
0
0
..
0.253
..
-0.74
8
2008
2009
..
0
0
0
0
0
..
..
2.924
2.779
0
360.073
0
29.689
..
..
0
64.16
-232.303 -30.842
-2.274
-1.699
0
36
2010
2011
0
26.49
0
..
5.298
10.729
-5.563
0
89.488
-0.165
-0.278
11
0
51.532
0
..
0
-10.428
1.657
0
120.595
..
-0.771
26
§
Even when looking at the official data on flows from individual countries, the data is not very
meaningful, and there appear to be gaps in the collection methodology. In the above table,
one of the largest transactions comes from Hungary in 2009—which appears to be
ownership swap of 6% in Hungary's MOL for a 10% stake in Pearl Petroleum in the Kurdish
region—but there were similar transactions with Turkey's Genel Enerji, which are apparently
not recorded.
§
So, where do we look for a more nuanced and granular data set for understanding the
pattern of investment and economic development in Iraq’s economy?
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5. What is Foreign Commercial Activity (FCA) ?
§
Since late 2009, Dunia Frontier Consultants has maintained a database of public “publicly
reported investments, service contracts and other revenue-generating activities that involve
foreign-domiciled firms operating in Iraq.”
§
This is a broad umbrella category that does not correspond to the narrow definition of FDI
per se, but it does represent a unique longitudinal dataset for Iraq’s reconstruction and
economic development during the period 2010-2012. This is particularly true for any
attempt to understand economic activity with geographic or sector-specific granularity.
Date
Company Name
Sector
US$ (mil)
Country of Origin
Province
2011
Shanghai Electric
Electricity
$999.0
China
Wassit
2012
Samsung
Oil & Gas
$998.0
South Korea
Basra
2010
Undisclosed
Water & Sanitation
$965.6
France
Baghdad
2012
Weatherford
Oil & Gas
$843.0
Switzerland
Basra
2010
Leighton Offshore Private
Oil & Gas
$733.0
Australia
Basra
2010
Wintercroft Capital
Water & Sanitation
$700.0
Russia | Switzerland
Maysan
2012
POSCO & KNOC
Electricity
$700.0
South Korea
KRG
2012
Marmara
Real Estate Residential
$700.0
Turkey
Baghdad
2012
United Brothers (UB)
Holdings
Industry
$700.0
Turkey
Basra
2011
Undisclosed
Industry
$692.0
Iraq | Italy
Qadissiyah
2011
Ericsson
Telecommunications
$650.0
Sweden
Iraq-wide
2011
Baker Hughes
Oil & Gas
$640.0
United States
Basra
2011
Nursoy
Real Estate Residential
$600.0
Turkey
Baghdad
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6. Methodology & Qualifications Behind FCA
§
As the process of reconstruction in Iraq began in earnest in 2010, many of the major deals
and contracts being concluded were not in private foreign investment, but rather Iraqi
government or private-sector service contracts, production sharing agreements, lease
agreements, or foreign partnerships with private Iraqi investors. Increasingly complex and
opaque financing (soft loans by foreign governments, conditional or staggered project
financing, etc.) further complicate isolating FDI.
§
The data come from a combination of publicly available regional, Iraqi, and industry-specific
media, as well as private sources. Given the source and nature of the data collection, it is
inevitable that there are observational biases that produce inaccuracies. Many firms have no
incentive to announce their market entry or signed contracts. Open-source or voluntary
reporting of deals is likelier to capture activity in Baghdad and Basra, where more news
media are located/focused, while the KRG has superior record keeping of investment licenses
issued through Kurdistan Board of Investment.
§
The data generally includes only those projects that have either actually broken ground or
which have seen final contracts signed — rather than simply memoranda of understanding,
or investment licenses issued by the governorates — although final contracts themselves
offer little guarantee that any deal will actually materialize.
§
Many of the deals announced in Iraq have no assigned monetary value, and few financial
details are released. In order to fill these data gaps, estimates of deal value are made,
comparing pools of similar contracts and investments. Where possible, estimates were made
on the basis of more detailed averages (such as per MW or per housing unit average cost).
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7. Broad Trends
After three years of tracking FCA, several major early trends have emerged:
§
Oil and Gas to Drive Growth. With more than a dozen oil fields now under development by
foreign firms, IOCs are investing billions of dollars in developing the fields, but growing oil
revenues are finally allowing the Iraqi government to invest in other sector infrastructure
upgrades.
§
Stability Allows Broader Investment. 2009 and 2010 saw a major expansion of foreign
commercial activity beyond Baghdad and Iraqi Kurdistan. Major improvements in the
security situation across Iraq encouraged investors to look beyond the safety and stability of
the Kurdish region.
§
Non-O&G Sectors (esp. Real Estate, Electricty) Also Growing. Although investments in oil
and natural gas are expected to drive the majority of investment in Iraq, there is major
activity in other sectors as well. The National Investment Commission hopes to build millions
of new homes, as well as attract at least US$300 billion in foreign investment by 2015.
§
Regional Firms Lead, with Internationals Following. Outside of the oil and gas sectors,
regional investors from Turkey, Iran and the GCC have traditionally driven most FCA.
However, beginning with the second half of 2010, a significant number of European and
Asian firms began their participation in the Iraq market.
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8. Oil Exports Remain Primary Indicator for Investors
Source: State Oil Marketing Company (somooil.gov.iq)
2.7
2.42
Million barrels per day (bpd)
2.5
2.3
2.16
2.1
1.9
1.9
1.7
1.5
§
Bad weather was blamed at the start of the year, but now logistical issues are likely to keep
exports close to 2.4 million bpd (the average for 2012) through the first half of this year.
§
Total oil production in February is still 272,000 bpd lower than the post-1990 record of 3.235
million bpd achieved only five months ago. Production in the South rose by 45,000 bpd in
February (month-on-month) to 2.281 million bpd, while production from the northern fields
fell by 2,000 bpd in February to 682,000 bpd. There was no contribution from KRG.
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9. Security Also Closely Monitored
800
Reported Monthly Fatalities
700
600
500
407
400
300
339
200
100
0
§
Dunia carefully tracks security developments in Iraq, and has done since 2008. Although the
security outlook remains much improved since March 2008—and volatility in monthly
reported fatalities has been the norm during this period—there has been a slight increase in
violence from 2009 to 2013.
§
For now, investors who have entered Iraq will remain committed, but backsliding on the
security front may change this, and other investors will continue to be deterred.
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10. First Look at FCA: Monthly Deal Flow
40
35
Reported Deals
30
25
24
20
15
14
10
5
0
§
There has been a clear increase in the number of monthly announcement of deals since 2010
—with the monthly average nearly doubling from 14 to 24.
§
However, the peak monthly deal volume occurred in late 2011 / early 2012, and there has
been a gradual decline since then. This may be methodological (because of reduced
international and regional media coverage of Iraq), or it may reflect foreign firms’ reaction to
more recent political and security developments.
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11. FCA Deal Value Over Time
60
52.54
50
36.47
US$ billions
40
30
28.70
Estimates not covered in data collection.
17.93
20
10
28.31
6.74
3.87
5.04
1.17
2.70
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
§
FCA peaked in 2011 at US$52.54 billion in what was an exceptionally strong year for the
residential real estate, oil & gas, and electricity sectors.
§
Despite the sharp 46% drop in overall FCA, 2012 was still a very strong year for Iraq, with a
decline in deals valued at under US$1 billion of only around 12.7%. Some cooling off was
inevitable following the announcement of 12 billion-dollar deals in 2011.
§
However, during the entire period of 2010 – 2012, an average of 21 deals were announced
each month at an average value of just over US$150 million.
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12. Geographic Distribution of FCA (2010 – 2012)
§
§
This distribution speaks to
three primary drivers of FCA:
the population and relative
importance of the capital
Baghdad; the oil industry in
Basra; and the security and
unique legal and political
environment in the Kurdish
region.
§
Working Group on Infrastructure Finance in Iraq | © 2013
The cumulative FCA data shows
a clear concentration in three
areas: Baghdad, Basra and the
three Kurdish governorates.
However, despite the
overwhelming dominance of
these three regions, there have
been significant FCA in other
southern governorates related
to a host of reconstruction
activities in non O&G sectors.
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13. Geographic Distribution of FCA
2010
2011
2012
$16,000.0
$14,000.0
(US $ millions)
$12,000.0
$10,000.0
$8,000.0
$6,000.0
$4,000.0
$2,000.0
$-
§
There has been some important year-on-year variation…
» Steady decline in Baghdad
» Peak in Basra in 2011
» Spike in Ninewa in 2011
§
… but overall the same geographic concentration is evident.
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14. Per Capita Geographic Distribution of FCA
2010
2011
2012
$7,000
$6,000
(US $)
$5,000
$4,000
$3,000
$2,000
$1,000
$-
§
However, a per capita analysis of the same data shows the extreme concentration of FCA in
Basra – much of which is concentrated in the oil and gas sector, or in peripheral activity in
electricity, transportation infrastructure, etc., that is designed to bolster the oil production
and export process.
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15. Distribution of FCA by Top Sectors
2010
2011
2012
$18,000
$16,000
(US $ millions)
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$Electricity
§
Industry
Oil & Gas
Real Estate
Residential
Transportation Water & Sanitation
Major residential real estate deals have dominated FCA with several multi-billion dollar
investment projects promising tens of thousands of new units across major population
centers. Dunia estimated a nationwide housing deficit in 2012 at nearly 4 million housing
units, requiring the construction of around 650,000 housing units per year for a population
of 38 million by 2018.
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16. Distribution of FCA Valued Under $1 Billion
2010
2011
2012
$8,000
$7,000
(US $ millions)
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$Real Estate
Residential
Oil & Gas
Water & Sanitation
Transportation
Electricity
Industry
§
Multi-billion dollar deals (particularly in real estate and industry) distort FCA data. Looking at
deals valued only at under $1 billion, the prominence of oil & gas is again evident. However,
there are a healthy number of residential real estate deals as well.
§
The data also reflects the reconstruction priority of electricity, which spiked in 2011.
§
Industry has also been dominated by large-value individual deals in heavy or basic industries
like steel (US$2.088 billion), cement (US$1.9645 billion), fertilizer (US$2.125 billion).
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17. Top 10 Countries of Origin (2010 – 2012)
(US $ millions)
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Australia
Canada
China
Czech Republic
Egypt
France
Germany
Italy
Japan
Netherlands
Russia
South Korea
Switzerland
Turkey
UAE
United Kingdom
United States
2010
§
2011
2012
The geographic origin of FCA has varied widely from year to year, but it is relatively diverse
with 54 different countries active in Iraq, and the top 10 spot has been swapped between at
least 17 countries.
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18. Policy Recommendations: Investor Experience
Dunia and the OECD conducted a survey of active investors in Iraq across a variety of sectors,
and asked them about their experiences to date, their expectations for economic activity outside
of oil & gas. While many of the investors believed the next three to five years would be
challenging ones for non-hydrocarbon sectors, they also provided a series of recommendations
for reforms by the Iraqi government that would improve their business prospects.
§
Address security concerns / personal mobility. This issue was highlighted by all the
investors—either as a debilitating cost of doing business, or as a factor in trying to develop
consumer markets.
§
Enhance rule of law. Investors united around a simple program of (a) strengthening
contract enforcement mechanisms through the judicial and regulatory systems, (b) reducing
corruption, and (c) increasing transparency, and (d) clarifying lines of authority.
§
Improve liquidity conditions and access to risk insurance. Several investors noted
difficulties in securing cheap financing, and the extreme costs of risk insurance. It is unclear
how many investors have been dissuaded from doing business in Iraq because of these
constraints, but active investors stressed the need for financial sector development that
allows for the emergence of private banks, electronic payment systems and record keeping.
§
Relaxing customs / import controls. All investors faced delays and costs associated with
the difficulties of bring equipment and supplies into Iraq. This is partly to do with the quality
of transportation infrastructure (especially sea ports), but also requires reforming bureacratic
process.
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19. Policy Recommendations: Investor Experience Cont.
§
Streamlining and decentralizing the investment regulatory processes to unlock other
geographic areas in Iraq. Although most of the investors interviewed have followed the
dominant pattern of investing in Baghdad, Basra or the KRG, several noted that if there is to
be any hope of geographic diversification, the supervisory process of provincial activity must
be simplified and / or relaxed.
§
Improve market data. Across nearly every sector, investors said they needed more and
better data to build investment plans and to properly assess credit and counterparty risks.
This is not only for market data to be used by private businesses, but also for building credit
records of firms and individuals.
§
Capacity building and improved education of the Iraqi workforce. Several investors
lamented their ability to attract talented mid-level and senior-level staff from within Iraq.
Facilitating engagement between foreign firms and Iraqi professional associations
could help create “matchmaking” services to remove opacity from the labor market and help
reduce unemployment among more productive individuals. Another approach is to
accelerate educational exchange and study abroad programs to counteract brain-drain
and the reluctance of the Iraqi diaspora to return. This issue will gain in critical importance
as the current demographic youth bubble in Iraq reaches working age.
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20. Policy Recommendations: Development Strategy
SEQUENTIAL RECONSTRUCTION PROCESS
§
Export-Led
Growth
Sectors
In order to unlock investment in highly productive sectors
that will stimulate growth and reduce unemployment, key
market reforms and legislation will be required.
§
This level and quality of growth requires a carefully
constructed enabling environment that is a result of a
conscious industrial policy on the part of the government.
§
Import-Substitution
(Native Industry,
Correcting BoP)
§
Infrastructure Base
(Electricity, Transportation, etc.)
Working Group on Infrastructure Finance in Iraq | © 2013
Knock on effects in peripheral
industries will result in investments
in sectors that are less competitive
to do transportation costs and
import restrictions.
Given increased oil revenues, a
large part of this process will happen
organically to facilitate hydrocarbon
extraction, and address most dire
reconstruction needs (e.g. heavy
industry).
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