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Iraq: Steel Industry Overview

Across the Middle East, Arab companies are positioning themselves to take part in the reconstruction of Iraq, either as subcontractors to US firms working in the country, or as exporters and suppliers of goods and services to the Iraqi market.

Some are even considering establishing joint venture partnership with the Iraqi private sector. Hopes of windfall profits for companies working in Iraq have pushed up stock markets in the region since the beginning of the year by more than 54 percent in Kuwait, 14 percent in Jordan, 28 percent in Saudi Arabia, 64 percent in Egypt, 6 percent in UAE and 19 percent in Oman. While the expected returns and profit margins in Iraq can be huge, the risk of doing business in a country with no functioning legal system and in the absence of a stable and recognized government could be equally high.

The transition to a new Iraqi government and administration endorsed and supported by the people of Iraq may take at least two years to be accomplished. During this period, companies investing in Iraq or trying to do business there will be working in a country that lacks constitutional and legal framework. In the absence of impartial judicial system that could enforce contracts signed with Iraqi counterparties and protect the rights of foreign suppliers and investors, the business climate will be quite risky. It seems that until Iraq gets a new constitution and a representative government able to put in place a culture of corporate governance, the current de facto administration of the coalition forces will have to shoulder the responsibility for contractual arrangements signed on behalf of the public sector.

In the middle of all these uncertainties, Iraq's oil and gas revenues over the next decade will be nowhere near sufficient to meet the country's anticipated reconstruction and development expenditure. Nor is there enough aid money likely to be forthcoming to close even a small part of the shortfall. Neither the US nor Europe or the Gulf countries are talking about anything like a Marshal plan for Iraq similar to the one that helped rebuilding Europe after World War II. The major potential sources of funding are, over time, likely to include regional and international developmental institutions such as the US Agency for International Development (AID), the European Investment Bank (EIB), the Arab Fund, the Kuwait Fund, the Islamic Development Bank, the World Bank and the IMF export credit agencies (tied to supply of home country equipment and services), and companies willing to invest in Iraq's infrastructure and industries by way of such financial structures as joint venture partnership, strategic shareholding and through built operate and transfer schemes (BOT). When Iraq reschedules its debt and starts repaying according to an agreed upon schedule, it should be able to tap once again the international capital markets and to borrow from regional and international commercial banks. It is worth noting that one or two financial institutions in the region have already started raising capital for country specific investment funds targeting business and investment opportunities in the Iraqi market.

So far nine contracts for the reconstruction of Iraq worth $2,400 million have been awarded by the USAID to American companies including Bechtel, Halliburton, Motorola, MCI, Research Triangle Institute, etc. Bechtel's $680 million contract gives the American company the responsibility for the design, rehabilitation, upgrading and reconstruction of Iraq's infrastructure including one seaport, five airports, electric power plants, road networks, rail systems, municipal water and sanitation services, schools and health facilities, select government building and initial satellite communications system. USAID has allowed the major American companies to subcontract up to half the value of their contracts to non-US firms, with an eye to benefit from the excess capacity available in the region. Furthermore, federal regulations in the US prohibit supplying materials from American companies if the cost is more than 6 percent higher than can be obtained locally for the project. What will happen in effect is that American companies like Bechtel and Halliburton will manage the projects, while companies from Jordan, Kuwait, Saudi Arabia and UAE among others in the region will provide material supplies and work on major subcontracts. Language, communications, proximity to Iraq, ability to provide quality products and services at competitive prices and knowledge of the local Iraqi market will boost the competitive advantage of Arab contractors and suppliers.

Iraq is also a large consuming market for all sorts of products including food supplies, clothing, cigarettes, pharmaceuticals, detergents, furniture, paper products, cement, steel, fertilizers, cables, cars, tractors, computers, white goods, satellite dishes, electronics, mobile phones, generators, and air-conditioning among others. On the services side, the Iraqi market needs consulting, banking, insurance, health and medical services, land transport, advertising, auditing, printing, courier services, information technology, as well as, legal and management support services among others. Most of these goods and services could be exported to Iraq from neighboring Arab countries. In certain cases, there are major advantages for building a manufacturing operation in Iraq or establishing a presence in the country to provide professional services. This could be the most successful way to enter the Iraqi market and will give Arab companies a headstart vis--vis the competition. The best approach is to establish joint venture partnership with one of the leading Iraqi merchant families to capitalize on their knowledge of the local market.

Those companies who can wither the initial period of commercial and legal uncertainties and are willing to act quickly will be handsomely rewarded. There are ample opportunities across all sectors of the economy to invest in. Besides rebuilding the infrastructure and expanding the country's manufacturing and agricultural base, the list would include building first class hotels in Baghdad and Basra, private hospitals, schools, department stores, storage facilities, mobile telecommunication, entertainment centers and banks among others. The banking system in Iraq for example needs a complete revamp. The large archaic public sector commercial banks (such as Rafidain and Al Rashid) dominated the banking scene for years. The 16 privately owned banks accounted for less than 6.6 percent of total deposits in 2001, and loans above $20,000 are a rarity.

Another promising sector in Iraq is the agricultural sector. With plentiful water resources and fertile soil, Iraq main source of economic power besides oil lay with farming. It was only until the 1950s that Iraq lost agricultural self sufficiency when the government started to invest more in the oil sector. Iraq has a variety of agricultural resources ripe for expansion by an entrepreneurial private sector. Dates, vegetables, wheat, poultry products, cattle and sheep all are likely to provide attractive business opportunities in the years to come.

To conclude, there will be ample opportunities for those Arab companies who are interested to participate in the reconstruction and the rehabilitation of Iraq. Some may choose to wait until a representative government is elected and a legal infrastructure is put in place. While such a development would help protect the investor and reduce the risk of doing business in the country, nevertheless, it could take two to three years to materialize and once in place, companies would end up reaping only normal returns. The more daring Arab companies who are willing to take the risk and can design a strategy to mitigate political and commercial uncertainties associated with the initial period, will find themselves at the center of the 21st century's first goldrush.

Source:- Henry T. Azzam - Arab News - 16/06/2003

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