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Iraq's big rebuilding project

Damage to the country has been severe. The recovery needs lots of money and willing investors

It has been a brutal 15 years for Iraq since the US-led invasion. Now, as the country heads towards parliamentary elections in May, its politicians believe Opec's second-biggest oil producer is entering a new phase of growth and rehabilitation.

Green shoots are cropping up. The IMF, which in 2016 began a string of loans to Iraq amounting to $18bn, says the country's GDP will rise by 3% this year, following a contraction in 2017. Higher oil prices and exports are helping. Iraq's budget this year envisages a $20bn deficit. But its oil-price assumption is a modest $44 a barrel. If international prices hold around the $70/b level reached in early April-and Iraq keeps exporting at about 3.4m barrels a day—the shortfall could turn into a surplus.

Investors, especially from neighbouring countries, are hovering with intent. This includes not just Iran, which alongside political influence has been exporting goods for several years and is now also shipping natural gas to Iraq, but Gulf Arab countries too. Emirati and Kuwaiti companies spy Iraq's large market of 40m people. Saudi Arabia is building ties—even pledging to build a new football stadium in Baghdad. Chinese and Russian businessmen compete with Westerners for hotel rooms in the capital's secure Green Zone.

Iraq certainly needs the money. The destruction—humanitarian, as well as to all sectors of the economy—has been severe and the government envisages a huge rehabilitation programme. The Islamic State (IS or Daesh) offensive of 2014 and the years of fighting that followed battered Iraq, a country that was already scarred by decades of war and sanctions. The UN says the conflict displaced 6m Iraqis and 2.6m of them are yet to return home.

Daesh damage

By 2017, said a recent prospectus prepared by Iraq's Ministry of Planning (MoP), the cumulative losses from the conflict to non-oil GDP stood at $107bn, equivalent to almost three-quarters of Iraq's total GDP in 2013, the year before IS advanced on Mosul. Although the south and its big oilfields were largely spared, damage elsewhere in the energy sector was colossal. In the power sector, plants, substations, transmission towers and company offices were ruined. Eight of 17 power plants assessed by Iraq's governorates were completely destroyed and the others are either still offline or operating at reduced capacity. The MoP puts the damage at $7bn and the need for investment at $9.1bn over the next five years.

Investors, especially from neighbouring countries, are hovering with intent

The oil and gas impact, while not on the same scale, was still significant. In particular: IS's capture of the Baiji refinery, halfway between Baghdad and Mosul, in 2014; the plant's subsequent looting by the militants and the anti-IS militias that later retook it; and the displacement of its workers have left it inoperable. It accounts for about 85% of the $4.3bn damage to the oil and gas sector, reckons the MoP. Investment of $7.2bn would be needed to repair it all. Baiji, with 310,000 b/d of nameplate capacity, is integral to the entire rehabilitation and even security of Iraq too. It once supplied a third of the country's fuel. Iraq pays more than $2bn a year to buy gasoline and diesel, all imported through the south—money that could be better spent elsewhere. Fuel shortages have often been a source of underlying tension in some parts of Iraq.

But coming up with a repair bill is one thing—finding the money to cover it all is quite another. And despite the increased appetite of some regional investors, many others remain wary. The MoP's damage and rehabilitation assessment was part of the Iraq government's pitch at the Kuwait International Conference for the Reconstruction of Iraq in mid-February. Up for grabs were more than 200 projects designed to lure in $88bn of investment. Yet the three-day forum yielded commitments of just $30bn.

Legal limbo

For all the opportunity Iraq is touting, many investors still fear the country's notorious bureaucracy, deeply entrenched graft, punishing contract terms and what appears to outsiders as fundamental reluctance to promote private and foreign capital. Reports of IS's reappearance in pockets of the country's north and the rapid expansion of the Popular Mobilisation Forces, or Hashd, into quasi-official roles in the security apparatus and economy are also a deterrent.

Laws, even those governing much-needed investment, are often opaque, noted Noor Kadhim, head of international arbitration at Cubism Law, a boutique firm, at Iraq Energy Institute's recent forum in Baghdad. "Iraqis feel that everyone is dying to come and invest in Iraq," says Salem Chalabi, a partner at Stephenson Harwood, another law firm. "They're not. The laws are not there. The way the government treats the private sector is really wrong."

Baghdad has suffered substantial financial losses from the conflict

Even basic legislation remains in limbo. "We had the best stock-market law ever written in the region," says Shwan Ibrahim Taha, head of Baghdad investment firm Rabee Securities. "It encourages foreign investment, private investment, pensions. It was written with the help of the SEC in 2008-09." Yet it remains stuck in parliament.

Even Iraqi investors, noted US ambassador Douglas Silliman in a speech at the energy forum, were deploying their capital in Dubai, Amman or Beirut, "because it is much easier to make a profit there than in Iraq".

Yet these kinds of pleas, and the message sent by the underwhelming response at the Kuwait donor conference, may go unanswered. The senior members of Iraq's government know it needs the investment, but politics are about to intervene once again.

Political risks

Parliamentary elections on 12 May are unlikely to produce a government quickly. Some parliamentarians say they expect the horse-trading to go on for months afterwards. Prime minister Haider al-Abadi, campaigning as the man who liberated the country from IS, has gained considerable standing, especially internationally. But he's anything but a shoo-in—even if he gets the most votes. His own party, Dawa, is split and the leader of one faction, former prime minister Nuri al-Maliki, is doing his best to disrupt Abadi. Maliki himself is thought not to be seeking the premiership again, but only to play kingmaker. (In 2014, Abadi won a fraction of the votes that went to Maliki, yet became prime minister.)

The advent of IS from within the Sunni minority, the rise of Shia and often Iranian-backed Hashd (some of which have coalesced into their own political movement, Fatah), the presence of Kurdish and secularist parties vying for a say in government formation—all of it means the coming election takes place in a political landscape deeply fragmented, even by Iraqi standards. Thousands of candidates are standing, but government will depend on alliances between a handful of main blocs.

To some MPs this is a sign of Iraq's maturing as a democracy. In an interview with Petroleum Economist, former oil minister Ibrahim Bahr al-Ulloum talked of his "optimism" about an election that could see Sunnis ally with Shias again, Kurds with Arabs, and Communists with Islamists (such as Shia cleric Moqtada al-Sadr). Not everyone else is so sanguine. And no one is willing to bet on who will emerge to lead the Shia block and become prime minister. The safest bet may be on a compromise candidate.

Despite plans for reconstruction, Iraq's politicians will soon be consumed not with investors but with each other. Threats to its sanctity will only re-emerge if the bigger reconstruction effort is now shunted to the back shelf.

The MbS effect

"We are aware that good strategy alone is not enough…good governance, monitoring and accountability will be critical to ensure that the reconstruction and development programmes are effective and meet the demands of the Iraqi people."

So writes Maher Johan, of Iraq's Ministry of Planning, at the outset of the prospectus prepared for investors who attended February's donor conference in Kuwait City.

Yet after years of political dysfunction and graft in Iraq, Westernised diaspora Iraqis—many in positions of investment influence, and often from a generation younger than the country's old guard—are tiring of the fine words. They want real change.

"Daesh is being used as an excuse," said one of these disgruntled Iraqis from the podium of the Iraq Energy Institute's forum in Baghdad in late March, referring to Islamic State by its Arabic acronym.

$107bn—Loss to non-oil GDP caused by IS war

Iraq has announced a vision for 2030—though unlike the Saudi one, proclaimed with great fanfare and constantly pushed by its leaders, you might not have seen it. "I'm very sceptical," says Shwan Ibrahim Taha, head of a Baghdad-based investment firm, Rabee Securities. "Yes, we want to diversify the economy, bring in private investment. But being in the top 10 most corrupt countries in the world?" Iraq doesn't need economic reform, says Taha, "it needs economic revolution".

That will be hard. Some government critics say the authorities' willingness to listen to ideas about how to lure investment has evaporated in the past year. "As oil prices creep up, that is on the backburner," says an investor.

Even the IMF, whose loans helped stabilise the economy in the past two years, met intransigence. "There was significant resistance to some of the reforms the IMF was suggesting—like a transition to an economy less dependent on oil," says Salim Chalabi, an Iraqi lawyer at Stephenson Harwood. "There was significant resistance to this."

Bureaucracy is big beef. "Some young people are making companies here that are worth millions of dollars and would be very eligible for us to raise money," says Taha. "But when you look at his papers, he doesn't have a company. Why not? 'I tried (to set one up) but they sent me from one place to another.' We hear from the government: 'Let's form a committee'. I just walk out of rooms now when I hear that—it's like when my parents used to tell me 'inshallah'."

It's the kind of sorry view held by many Iraqis who have spent the past decade working abroad, but remain keen to help rebuild their country. "Half of what I do in Iraq, my bank considers social outreach," says Hussein Qaragholi, the Senior Originator for MENA in Corporate Finance at Deutsche Bank.

The difference these days is the air of economic revolution elsewhere in the region. "We need to learn from the example of Saudi Arabia," says Taha. "MbS saw the trajectory, that they would be slammed up against the wall." He's not the only Iraqi looking admiringly at the Saudi crown prince.

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