Eye on Iraq by Publish

١ ‫العدد‬ ٢٠٠٩ ‫خريف‬ ‫عدد مجاين‬

Issue 1 Autumn 09 Complimentary

ICCB Group’s new business quarterly

Potential energy What delays in the Oil and Gas Law really mean

Safe as houses Iraq’s new home construction boom

Happy returns The Iraq Stock Market enters the 21st Century

Building consensus As Iraq’s Foreign Investment Law finally nears completion, who can best take advantage?

The official magazine of

Iraqi Consultants & Construction Bureau

Construction Investment Energy Security Markets Interviews Analysis Construction Investment Energy Security Markets Interviews Analysis

Editor’s letter

Welcome Security in Iraq is a major obstacle to investment in a country that is still in rebuilding mode.The internal conflicts of the past five years have obviously deterred foreign investors, but security improvements in the last 12 months have helped stabilise the economy and, as a result, increased the demand for goods and services significantly.This heralds a turning point in Iraq’s economic development, which offers encouragement for domestic as well as foreign companies who are considering substantial investment in the country. At the Invest Iraq conference in London last April, Iraq’s Prime Minister Nouri al-Maliki urged British firms and private investors to start moving to Iraq and participating in the reconstruction of the country’s devastated infrastructure. Former Deputy Prime Minister Dr Barham Saleh expressed the importance of economic reconstruction to the lasting stability of the country. “Jobs and services are the best counter-insurgency strategy with economic reconstruction based on private-sector initiative,” he said. The Iraqi government is attracting foreign investments by overhauling the regulatory environment to make doing business easier, promoting private-sector management through equal treatment of foreign and local investors in all areas except land ownership. And even the land ownership clause in the investment law is being amended – a move welcomed by many officials as well as local and international businessmen and investors. Apart from security, other challenges facing the economy include inflationary pressures and the state’s over-dependence on oil, which makes up to 91 per cent of budget revenues, while also needing an estimated $50 billion in investment over the next seven years to develop and upgrade the oil and gas sector facilities and installations.The housing sector is another important area where foreign investment is desperately needed. Iraq’s Ministry of Housing estimated the need of more than one million housing units over the next 10 years. The global financial crisis is intensifying the need to boost oil production and to diversify the economy. Iraq’s Minister of Industry said that “other industries could deliver up to 20 per cent of the country’s GDP” – therefore transportation, telecommunication, trading, housing, and manufacturing should be the target of private companies, domestic and foreign, to start their investment. Despite the fall in oil prices and the international economic crisis, the IMF estimated that the Iraqi economy will grow by 7 per cent during 2009, and will continue to increase at this rate for the next five years.

Shwan al-Mulla President ICCB Group

Autumn 09

FONT

eyeoniraq ICCB Group’s new business quarterly

Contents OUTLINES

Group President and Publisher Shwan al-Mulla shwan.almulla@iccb.com

economy

4 Oil & Energy

Iraq’s housing sector takes off Kuwait plans reparations investment E-payment improvements

Oil and Gas Law still delayed Shell’s talks with government look positive Russia and China seek to enter the market

Editor in Chief Ghaleb Wiswasee ghaleb@neareastmedia.com Senior Designer Maysa Sultan maysa@neareastmedia.com Editorial Assistants Abir Alna’ib Tamara Nouri Picture Editor Hedaia Hammad

Managing Director Jawad al-Anis jawad@neareastmedia.com Editorial Director Eddie Taylor eddie@neareastmedia.com

Politics

10 Interview

Confronting the obstacles to the next general election Increasing the border security budget Further US troop withdrawals boost confidence

Eye on Iraq talks to Taha Adbul Salam, CEO of the Iraq Stock Exchange, about the important development from a single session with manual transactions to the all-new electronic trading environment.

Marketing Manager Dana Baghdadi dana@neareastmedia.com Advertising/Sales Sarah Dasouki sarah@neareastmedia.com Hani Farah hani@neareastmedia.com

Published by Near East Media

Analysis

18 Investment focus 22

Dr Omar el-Qadhi, PhD Business and Credit Analyst, looks at the development of the crucial Foreign Investment Law in Iraq – and what it can mean for the influx of much-needed foreign capital.

The Iraq transport sector has been starved of vital investment for the best part of four decades. But with 29 million potential users, it could be one of the most important opportunities for capital injections.

Featuring Taha Abdul Salam, CEO of the Baghdad Stock Exchange, talks to us about the future of trading in Iraq.

Autumn 09

Dr Omar el-Qadhi explores whether the Iraqi Investment Law has attracted the necessary investment.

Amman office PO Box 940166 Amman 11194 Hashemite Kingdom of Jordan Tel: 00 962 6 516 3357 Fax: 00 962 6 516 3257

Printed by National Press

EYE ON economy

Construction

Iraqi housing sector booms Massive programme of house building across the country creates far reaching opportunities for local and internal firms in Iraq

IMF grants Iraq $5bn to boost economy Funding secured to alleviate budget deficit and underpin government spending

Autumn 09

The Iraqi Minister of Finance, Baqer al-Zubaidi, (pictured above) said that the IMF has agreed to grant Iraq $5 billion to support the government budget. After a meeting in the Turkish capital of Istanbul, the funds will be disbursed between 2010 and 2011 he said. “The money is to support liquidity and to improve growth of the Iraqi economy,” Mudher Kasim, Central Bank advisor, explained to the Dow Jones Newswires. Kasim said that the money is expected to be spent on infrastructure projects. A massive budget deficit, estimated at nearly $19 billion this year, added considerable pressure on the government to try to find new sources of financing. The $5.4 billion standby loan will be paid back in two instalments over five years at an interest rate of just above 1 per cent, according to Kasim. He also predicted that inflation will hover at the same level for the rest of the year. Iraq’s August inflation soared to 10.8 per cent compared to around 7 per cent in July, driven by a decline in agriculture production and soaring foodstuff prices. Iraq’s non-oil sector economic growth is seen at 5 per cent during the first nine months of this year.

The housing sector received a boost with a government plan to add 350,000 units a year over the next ten years.

Kuwaiti reparations Gulf country looks to reinvest some of Iraq’s reparations back into the country

AFP, REUTERS

he Mayor of Baghdad, Sabir al-Issawi, has revealed a five-year plan to build 300,000 housing units in the city. According to al-Issawi, the country is talking with a wide variety of developers from across the world who are interested in investing in the country’s real estate market.The Iraqi government has identified the need for more than 1.5 million residential units countrywide. A New Zealand construction firm, Atconz Real Estate Development, said Iraq is one of the most exciting emerging markets at present, and is about to start work on a $100 million project to build 1,565 residential units in a suburb of Irbil, the capital of the Kurdish region. Last June, the Iraqi cabinet approved a 10-year plan to build 3.5 million housing units, a government source said. The source, refusing to be named, said the plan once implemented should “put an end to the current housing crisis” by constructing 350,000 units every year. The project will be financed from oil revenues. “The project has attracted the attention of international property firms in the UAE, Brazil and South Korea,” the source added. Kurdish-held provinces of Erbil, Dahouk and Sulaimaniya will not be covered as the authorities there receive the region’s share of oil royalties estimated at 17 per cent of what the country earns annually. The units, mainly flats, will be sold to families without a plot of land or a house of their own. “They will be sold to Iraqis in return for affordable monthly instalments,” the source said.The Real Estate Bank will provide the loans for civil servants that will almost cover the purchase.The project is the largest ever in Iraq and if implemented the country may eventually land on a success story. In the meantime, the Iraqi Ministry of Housing and Construction has now completed the draft of its national housing policy, which it stated is part of a much wider project to strengthen the capacity of the housing sector in the country. “Following thorough discussions during a two-day workshop, the ministry has made its final amendments to the National Housing Policy draft,” a senior under-secretary of state in the ministry, Istabrak al-Shouk, said in a statement released by the ministry. The draft is part of a project to improve the capacity of the housing sector in Iraq, conducted by the ministry in cooperation with the United Nations Human Settlements Programme in Iraq.

Kuwait is said to be considering a proposal, which is supported by the United Nations, to invest the reparations from Iraq’s1990 invasion of the country, which are still being paid by Baghdad, in Iraq in an attempt to settle the issue. Kuwaiti Foreign Minister Sheikh Mohammad al-Sabah said that the Kuwaiti government is thinking about this proposal. Many Iraqi politicians have rejected such a compromise, and some lawmakers demanded an end to

these payments, saying they are “an unfair burden on the national economy”. So far Iraq has paid $27.1 billion to Kuwait, with another $25.5 billion still to be paid. A Kuwaiti lawmaker urged his government to agree to this proposal and invest jointly with Iraq in industry and projects for rehabilitation of the Marshes and the Shatt al-Arab waterway, establishing medical and media cities on the border of the two countries.

Autumn 09

EYE ON economy

Utilities

Water, water, everywhere? Strategic plan for Iraq’s water management gains traction

REUTERS

he Director for Water Resources, Oun Thiab Abdullah, said that Iraq is receiving offers from three international companies to create a 30-year strategic plan to manage the country’s water resources. Abdullah said that 30 companies were invited to bid for the $50 million project, but only three came back with substantive offers. The companies are from the UK, Russia, and Italy, and the Ministry expects to select a winner within a month. The plan, which Abdullah called “a master strategy”, will help the Iraqi government determine how to use the limited waters in the best way to confront its decrease and the environmental changes which caused recent draughts in the country. Iraq is facing a shortage of water in both the Tigris and the Euphrates due to the construction of dams by Turkey and Syria over the Euphrates, while Iran has recently started changing the course of the small rivers flowing into the Tigris River. In addition, shortages of rainfall for the third consecutive year added to the crisis. Agriculture has been hit badly by this crisis, which forced many farmers, specially in the south of the country, to abandon farming and demand the government should compensate for their losses.

Iraqi payment services improve

Facts

E-Shopping site launched

he Tigris River is 2,012km long, and T rises in the Armenian plateau in Turkey. T he Euphrates river is 3,058 kilometres long, and rises in Taurus in Turkey. Both rivers merge, at Qurnah in southern Iraq, to form Shatt al-Arab waterway which flows into the Arabian Gulf. T he Ilisu Dam is the largest Turkish dam being built on the Tigris River. It is

Autumn 09

one of 21 dams of the Southeastern Anatolia Project. Construction started on August 5th, 2006, but was halted after international funding was lost in December 2008 before it was resumed in July 2009. When completed, its reservoir is expected to hold a maximum volume of 10.4 billion cubic metres of water.

More than 650,000 credit cards issued

The Director of Rafidain Bank said that 660,651 credit cards have recently been issued in an attempt to introduce modern technology to Iraqi banks. Abdul Hussein al-Yassiri said, “412,635 cards were issued by the Rafidain bank, while 168,624 cards were issued by al-Rasheed bank.” Implementing the directions of Finance Minister Jabr al-Zubaidy, al-Yassiri said that 47 branches of Rafidain bank are now dealing with credit cards. He added that there is ongoing work to introduce and activate this project to cover the banking system all over Iraq. The other project which will be soon activated is the Points of Sale (POS) system, which will enable cardholders to carry out money transfers at various locations using their cards. Iraq sees its first e-shopping website Harej.com, an eBay-style trading website. Founder Mahdi al-Jawadi took the name from the ancient Baghdad market, and hopes to connect buyers with sellers for free. “It will take some time for people to catch on since the country’s economy is almost entirely cash-based,” he says, “and a small portion of the population have internet access.” Harej.com is hosted on a British server and runs in Arabic and Kurdish. It offers new and used goods in categories such as real estate, electronics, books, furniture and vehicles. By far the most popular section is cars. Al-Jawadi plans to develop a delivery service for buyers and hopes he can tap into the global market.

EYE ON ENERGY

Talks with Shell progress

Oil & Gas

Oil & Gas Law still Undecided

Dutch oil giant says development of new gas fields in the south is on track

Chinese company to build power plant in Kut

Grapheast - EPA, Grapheast - Newscom

Autumn 09

The KRG has been signing oil exploration and production/ export deals for three years now, but the Oil Ministry says that they are without the central government’s consent and therefore these deals are illegal. However, the Oil Ministry says that they may reach a compromise with the Kurdish region and green light Kurdish exportation provided that the oil from Kurdistan is transported by Iraqi pipelines through Turkey. Most of the political blocs inside the parliament are accusing the Kurdish government of obstructing the law, but the KRG has rebuffed these accusations. “The law will offer legal status to the Kurdish oil deals which were long opposed by the central government and the Oil Ministry,” said Mahma Khaleel, Kurdish member of the Parliamentary Economic Committee. The lack of a legislation governing investment in the oil and gas sector has discouraged oil giants from entering the Iraqi oil market. Last June, the Oil Ministry offered 10 blocks of existing oil and gas fields for development in what was called the “first round” of licensing. A total of 32 firms participated in this round but only a consortium of BP and the Chinese National Petroleum Company won a contract to develop the giant Rumail field in southern Iraq. A “second round” of licensing will be held during December, which will be preceded by a conference aimed to encourage oil firms to participate more in developing the oil fields and installations in Iraq.

Russia’s GAZPROM bids for Iraq oil and gas fields Russian oil giant Gazprom is set to bid for oil and gas fields in Iraq in a consortium with Turkey’s state-owned TPAO. Iraq’s Oil Ministry is selling 10 lots with total reserves of 41 billion barrels and about 740 cubic metres of natural gas. The Turkish firm is bidding independently for six lots, while the consortium is in the hunt for the remaining four. Around 45 companies were invited to bid for the lots, including Russia’s state-owned Rosneft and Gazprom Neft, as well as Lukeoil. Iraq is planning to earn US$1.2 billion from one-time payments and will retain a 25 per cent stake in each project. The terms of bidding will be announced in November. Last June, the Turkish firm unsuccessfully bid for 10 lots of fields with the reserves exceeding 47 billion barrels of oil

Passing of crucial legislation in parliament is delayed by ongoing disputes over the Iraq Constitution and foreign investment provisions

he Chairman of Iraq’s Hydrocarbon Parliamentary Committee recently ruled out the possibility of passing the Oil and Gas Law during the current parliamentary session. In a press conference, Ali Blo said that several laws crucial to the oil sector, including the Oil Law and the National Oil Company Law, have been delayed due to differences over the interpretation of the Iraqi Constitution. He said that he expects that the law will be passed by the next parliament. The much disputed and much delayed law was first issued in February 2007 and approved by the Iraqi cabinet, but has not yet been passed by the parliament. Hydrocarbon Committee member Jaber Khalifeh said, “Disputes and differences between political blocs are preventing us from reaching an agreement on the law.” The main dispute between the central government and the Kurdistan Regional Government (KRG) is over the four appendices that govern the exploration areas; while the Oil Ministry says that the first two appendices should be under its responsibility, the KRG demands that all four be open to foreign investment. Jaber added, “The differences over the law are unrealistic since both governments have opened up foreign investment in this sector.” Similarly, the KRG are denying the existence of technical disputes over the law, saying that “they are merely political differences,” according to Kurdish legislators.

NEWS BRIEFS

Facts Iraq’s proven reserves are estimated at nearly 115 billion barrels – 11 per cent of global reserves. Iraq produced 2.5 million bpd in 2009 Oil exports reached as much as 2.08 million bpd in August, 2009, declining to around 1.88 million bpd in October.

he chief executive of Royal Dutch Shell (RDSa.L) said he is pleased with the progress of negotiations with Iraq on developing natural gas currently flaring in Basra. Last month Iraq’s Deputy Oil Minister, Ahmed alShamma, speaking as a private citizen not on behalf of the Iraqi Oil Ministry, said he expected the Shell contract to be signed after the January 16th elections in which the OPEC nation will select a new parliament. “We are currently negotiating a final agreement for gas in south Iraq,” Peter Voser, the CEO of Shell, told a meeting at the Woodrow Wilson International Center for Scholars. The Iraqi government has been working to finalise the joint venture between its South Gas Company and Shell and Mitsubishi (8058.T).The deal would capture huge amounts of gas for domestic use or export, which is currently wasted by being flared at the oil fields. Once in place, the venture would be at the forefront of Iraq’s plans to modernise its energy facilities and boost oil exports, which are still hovering around the levels they were at before the US-led invasion in 2003. However, the plan faces opposition from lawmakers who criticise its terms and say it would be unconstitutional unless they specifically approved it. On oil deals,Voser said Shell is in “constant contact and discussions with the Iraqi government” about the second round of bidding for contracts to

Shanghai Electric Engineering Company has begun implementation of the Wasit thermal power station, according to Said Samer Abed Ali, chief engineer at the power plant, who strongly denied the company had pulled out of the project. Abed Ali acknowledged certain delays due to “administrative obstacles by international banks who will act as the guarantor”, but confirmed that a series of meetings in Amman had overcome those obstacles. The contract value is US$924 million, of which the Chinese side has received the first installment of US$84 million. Wasit thermal power plant consists of four generating units with a capacity of 1320MW. Abed-Ali stressed that the station would have “a very positive role in supporting electrical power in the country’s future”. Iraq is currently producing about 8000MW of power, which is less than half the country’s requirements, and the Minister of Electricity said recently he needs more funds to implement new power projects – and more fuel from the Ministry of Oil.

We do hope the second round of talks will be more successful for both sides Peter Voser, CEO of Shell

develop Iraq’s vast oil fields. Shell has not yet bid on the second round. Shell and more than 40 other of the world’s major energy companies have qualified for the second round, which is expected to culminate in December. The company withdrew from the first round because it did not like the conditions offered by the Iraqi government. “We do hope the second round will be more successful for both sides, the Iraqi government and people, and international oil companies,” Voser said.

Current oil production in Kurdistan

Kurdistan estimated oil reserves

80,000 bpd

40 bb

DNO shares recover after Kurdistan issues resolved Shares in Norwegian oil company DNO rose by 30 per cent on news it will resume its activities in northern Iraq after the settlement of differences with Iraqi Kurdistan. However, the company said it will not export its oil from the Kurdish region after the failure of the KRG to agree to a payment mechanism with authorities in Baghdad. The company said that the government of Iraqi Kurdistan reintroduced productionsharing rights but a central decision on such rights were suspended on September 21. Carl Christian Paschke of Fonsdvaenanc brokerage said, “It’s a step forward, but a step back as well,” adding that there will be no oil exports until the payment mechanism is settled. The company’s shares rose 31.2 per cent is response to the news. The value of DNO is strongly linked to its assets in Iraqi Kurdistan, so investors were troubled by the possibility of a permanent cancellation of licenses.

Autumn 09

EYE ON POLITICS

Budget for Border Security

Elections

Ministry of Interior allocate ID500b for tight borders

Grapheast - EPA

Ballot obstacles

Row over voting system, and IHEC role remains an issue of dispute

raqi legislators are running out of time to settle their differences on two important issues related to the upcoming national elections. The adoption of a closed or an open slate system in the parliamentary elections remains a highly debated issue. A far-reaching popular demand backed up by the support of the religious supreme authority in Najaf to choose the open slate system has caused arguments and prolonged discussions inside the parliament without reaching any decision yet. The previous election was conducted with the closed slate system, which meant that Iraqis had to cast their votes for specific lists including a number of candidates, and not for individual candidates. This meant that even if the list included unqualified or unknown candidates, they would still get a seat in the parliament – simply because their list won the highest number of votes. Now after four years, Iraqis are unsatisfied with the performance of their representatives. Iraqi people feel that those men and women who they have elected are unqualified and are carrying out the policies of their own political parties without doing much to improve Iraqis living conditions or to solve their daily problems. On the other hand, some political blocs and coalitions, who won the previous elections, are feeling this popular pressure, and started steering away from adopting the closed slate system, lobbying for an open slate system. Ammar alHakim, the head of the Supreme Islamic Iraqi Council, said, “The open slate will give the voter the chance to choose the qualified candidate, who will represent

10 Autumn 09

Facts

296

political entities are competing for 275 seats in the parliament. Largest coalition is the newly formed Iraqi National Coalition, previously known as the Iraqi United Alliance. PM Nouri al-Maliki, whose al-Dawa party left the Shiite alliance, formed his own coalition “The State of Law Coalition” to run for the next elections. VP Tariq al-Hashimi defected from al-Tawafuk Front, the largest Sunni bloc, to form “The Renewal List” party. Referendum on Kurdistan constitution to take place on January 16th, 2010 – the same day of the national elections.

his interests and who is capable of making important decisions inside the parliament.” Moreover,Vice President Adel Abdul Mehdi who visited Najaf recently, said that senior clerics in the holy Shiite city support the open slate system in the next parliamentary elections scheduled on January 16th, 2010.The elections committee has approved and registered 296 entities to participate in the elections. The second issue under discussion is the role of the Independent High Electoral Committee (IHEC). A number of MPs are debating on the necessity and the importance of restructuring the IHEC, accusing it of biased practices during the previous provincial elections last January, as well as during the preparations of this upcoming one. Despite the fact that most of the political blocs agree that some action should be taken regarding the IHEC, they have not agreed on the best way to amend it. Some blocs prefer the expulsion of the members of IHEC according to Baha’a al-Araji, Sadrist MP, who said, “The responsibility of IHEC is a consolidated responsibility, therefore all members should be removed.” Others are calling for replacing its director Faraj al-Haidari, and the head of constituencies, Qassim alAboussi. Ahmed Sulaiman, MP of al-Tawafuk Front, ruled out the possibility of removing all members of IHEC, and said that “removing al-Haidari and al-Aboussi, plus imposing strict monitoring procedures and guarantees on the performance of IHEC to ensure its impartiality and to close the door to any interference from government or political parties” is the more likely option to adopt.

he Iraqi Ministry of Interior said it has invested ID500 billion (around $425 million) in a large scheme to prevent infiltration of terrorists and arms from neighbouring countries. Ahmed Ali al- Khafaji, deputy minister for supporting unit affairs, said, “The Cabinet has approved allocating ID510 billion to be spent on developing border posts as part of a strategic plan to be completed over the next three years.” The plan includes construction of security stations, a network of paved roads along the borders, in addition to an early warning system. Al-Khafaji also added, “A 1,000 kilometres of borders with Iran and Syria will be covered by the early warning system by June next year.” About 660 new border posts and stations have been built so far, with 800 more expected to be built by year end. Blueprints for the border roads network will be completed by next April. Al-Khafaji also noted that 90 per cent of the 170 kilometres trench in Mosul, which borders Syria, have been completed – with the presence liaison officers from both countries facilitating the execution of this project. This trench experiment may be adopted on the borders of other neighbouring countries.The Iraqi government and officials have blamed neighbouring countries for loose control over their borders which allowed and encouraged terrorists and foreign fighters to infiltrate Iraq. During his visit to Iran last September, Parliament Speaker Ayad alSamara’ie said, “All neighbouring countries reaffirm their support to Iraq’s security, but in reality, the problem of the infiltration of terrorists, arms and explosives into Iraq is still ongoing, and unresolved.” Last February, Iraq signed a $5 billion arms deal with the United States to buy weapons – including small arms

1,000km of borders with Iran and Syria will be covered by June

and military equipment, in addition to a training deal. Iraq initially planned to spend $15 billion on buying arms, but the fall of oil prices this year forced the Iraqi government to shrink the defence budget. On its part, the US is helping Iraq in acquiring military equipment by leaving some used equipment behind, and by helping it finance the purchase of new gear, according to General Raymond Odierno – the current commander of US troops in Iraq – in a statement to Congress last month.

US Commander announces further troop withdrawals Another batch of US troops heads home as the security situation improves – leaving more Iraqis in charge of key security functions The US Army plans to withdraw 4,000 troops from Iraq by the end of October, according to senior military figures. General Raymond Odierno, commander of US troops in Iraq, announced his plan in his statement in Congress on September 30th. In his eight-page statement, Odierno also voiced cautious optimism about Iraq’s future, predicting some looming problems as the US troops prepare to end all combat missions in Iraq by the end of 2010, and overall withdrawal by the end of 2011. On the positive side, he cited data showing the number of monthly attacks has dramatically dropped over the past two years – from more than 4,000 in August 2007 to less than 600 last September. As for the foreign fighters, he said that fewer al-Qaeda terrorists remain in Iraq, and most of those who are left are criminals or disenfranchised Iraqis who have been recruited by, what he describes as, a “small ideological core” of insurgents.

We will have bad days in Iraq. But the bad days will get fewer 11Autumn 09

EYE ON POLITICS

Bilateral Relations

Grapheast - EPA

Iraq boosts Turkey ties Meetings between prime ministers Nouri al-Maliki and Recep Erdogan confirms trade deals and expanding mutual interests

raq’s Prime Minister Nouri al-Maliki met with Turkey’s Recep Erdogan in Baghdad for the second time in 14 months to consolidate relations between the two leaders. Al-Maliki said that the talks should be “considered a message to neighbouring countries which shows that Iraq seeks to strengthen its relations with all his neighbours”. In a joint press conference, al-Maliki also noted that the talks emphasized on building relations based on mutual interests, and described the Iraqi-Turkish

Food for thought Restaurant scene flourishes in Baghdad as normality begins to return to Iraq After six years of closure, due to the deterioration of security in the country, restaurants in Baghdad have reopened again to the public following an increase in the number of diners passing through their doors. The considerable improvement in the security in Iraq has encouraged Iraqis to go out and to enjoy their normal lives again. The famous Masgouf restaurants on Abu Nawas Street, which serve the Iraqi style barbecued fish, are once again open late into the night, with hundreds of diners forming long lines waiting to be seated. One owner said that he enjoyed returning to Iraq to reopen his restaurant to his old as well as new clientele. However, a number of business owners have urged PM al-Maliki to provide “moral and financial support to the private sector which is desperately needed to improve and develop their business”.

12 Autumn 09

Iraq seeks to strengthen its relations with all his neighbours

Nouri al-Maliki

agreement, which was signed last year, as a method of developing relations with other Muslim and Arab countries. For his part, Erdogan asserted that “he has agreed with al-Maliki to increase the annual trade between the two countries to US$20 billion”. Back in July 2008, during Erdogan’s first visit – and the first by a Turkish leader to Iraq since 1990 – the two leaders signed an agreement by which a high committee for strategic cooperation was formed.

The violence has caused a considerable damage to local business in Iraq, including cafes, and restaurants Ali Hameed, restaurant owner

THE Interview

Rate of exchange The Iraq Stock Exchange has been the ideal barometer for the economic progress of Iraq since the invasion of 2003 – and as CEO Taha Adbul Interview: Kareem Amin Salam explains, the signs are all positive

the Exchange.The ISX also managed to increase the weekly sessions again to three after we moved to the new premises in Karadah district in Baghdad, which is designed to house both the manual and the electronic trading halls.

EOI: Give us an overview of the Iraqi Stock Exchange as we close 2009. Taha Adbul Salam: The Iraqi Stock Exchange is a private, profitable establishment, which independently finances itself. It was established in April 2004, and despite our limited resources and the limited number of companies listed, as well as the obstacles faced, we managed to hold the first session on June 24th, 2004.We started with a single session a week, with trading done manually over white boards. After a couple of months, we increased the weekly sessions to two, although we couldn’t increase the number of the registered companies before approving their financial status.There are still a number of companies outside the ISX because they cannot fulfil the commitments required by

EOI: So when did you incorporate electronic trading in the ISX and how did it change the dynamics of the market? TAS: The manual trading phase continued from June 2004 until April 2009, and it caused big delays in transactions because any transition of property required the hard copy of the stock certificate, which again had to have the stamp of the holding company.We received a foreign grant to buy the electronic trading and central deposit system; one system stores data of the shareholders stocks certificates so that selling and buying can be done in seconds instead of days.The first advantage we achieved by using the electronic system is building a centre and database for the shareholding companies.The second advantage was monitoring and checking the shareholders’ balance during the session, and to be able to complete the trading operation instantly, without wasting any time. In other words, the trading system is connected with the central deposit system, so the broker can, during the day’s session, verify the shareholder’s balance, or the existence of a investor’s account before buying.This capability enabled high liquidity of shares. Therefore, I can say that the electronically traded shares have 100 per cent liquidity. On April 19th, 2009, we began

n 1992, the Baghdad Stock Exchange was established as a government body under the authority of the Ministry of Finance.Trading was an entirely manual affair, and very few companies were registered for share trading. However, in 2004, a law was issued to create the Iraqi Stock Exchange as an independent establishment.With Taha Adbul Salam as CEO, the ISX started to grow rapidly, both in terms of trading sessions and the number of listed companies, their activities, and the volume of shares traded on daily basis.Trading was also done manually at first, but in April 2009, the ISX started operating the electronic trading system. In August 2008, the ISX opened its door to foreign investors and shareholders to participate in trading.

14 Autumn 09

Taha Abdul Salam, CEO Baghdad Stock Exchange – MA Security, 1991, from University of Baghdad – Baghdad Stock Market Director of Studies, 1992–2003 – Iraqi Stock Exchange Executive Director, 2004 to present

with one electronic session with five companies, but now we have 64 companies registered at the central deposit centre. And on this occasion, I would like to announce, through your magazine, that as of November 1st, 2009 there will be five weekly sessions for both types of trading, and the number of companies electronically traded will exceed 75 while the ones in the manual trading is approaching 90. EOI:What incentives are the ISX offering in order to attract foreign, Arab or even expatriate Iraqi investors to the market? TAS: The ISX operates according to rules and regulations that facilitate the investment operation. These rules are no different than those in the Arab and neighbouring stock exchanges. The ISX depends on indexes, which are rules and procedures issued by the International Stock Exchange commissions, that the ISX then categorises and renews according to the nature of the Iraqi market. The electronic trading rules are all derived from those of the Arab and International Bourses and through the IASCO (International Stock Exchange) indicator, of which the ISX is a member. The other important factor is the trust in the indexes that the stock exchange reports. Between 2005 and 2007, the danger indicator was very high in Iraq. That’s why Iraqi, as well as Arab, investors were hesitant. But when we opened the trading for non-Iraqis in August 2008, investors from various nationalities like Egyptians,

The high confidence in our system increased the number of non-Iraqi traders

Gulf citizens, Americans and Europeans were keen on entering. And after we operated the electronic trading, all operations became clearer and easier, as the investor can obtain a “record” from the deposit centre. The high confidence in our system increased the number of nonIraqi traders, and according to our statistics, buying operations by non-Iraqis during September has doubled the selling operation by non-Iraqis, and this is a positive indicator that shows trust and confidence. EOI: Can you tell us who the predominant non-Iraqi investors are, where they come from, or what are there nationalities? TAS: Frankly, I don’t prefer to categorise investors according to nationality.There may be a number of investors from one country but their buying percentage is low, while there may be one investor with a very high buying percentage. It all depends on the volume of trading in a share or shares, and I don’t want to discuss details of trading through media because it is a matter of privacy. EOI: Do you think that the nature of the Iraqi economy and market will change if the Foreign Investment Law is implemented? TAS: The law has been in existence since 2008, and one of its clauses permits non-Iraqis to trade in the country.We were proud to be the first Iraqi establishment to implement the law back in August 2004, and before that date we

15Autumn 09

THE Interview

Grapheast - EPA, REUTERS

EOI: Do you see any hope that this law will be issued in the near future? TAS: As I said, the law is already there, but a lot of its clauses need to be amended, and according to my knowledge some amendments were presented by the Shura Council, the Ministry of Trade, and the Investment Commission. This is a positive development as interested parties are now directly steering relevant changes to improve the law and trying to eliminate bureaucracy. I repeat again that full co-operation between all establishments in the investment, the monetary, and the economic policy sectors is needed because the country needs vast investments and needs continuous daily rebuilding in order to catch up with global development.

Facts Figure 1 Inflation rate and core inflation 8 4 0 -4 -8 Jan 08 Feb Mar Jun Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar Jun Jul Aug Sep Oct Nov

operated according to rules that were prepared for this law. Every law needs to be amended or updated according to the needs, and I personally think the law needs amendments, and activation of some of its clauses that have not been implemented yet. Moreover, there are some laws governing registering companies, banking laws, or other company laws that contradict with the investment law.What we need is an expert council to review all these different laws and prevent one from invalidating the others in order to produce a database which can define or explain any specific order, decision or clause to facilitate investment in general.

core inflation

inflation rate

Figure 2 P rivate foreign investment in Iraq by sector 100 80 60 40

EOI: What is the reason foreign companies are hesitant in entering the Iraqi market, despite the facilitating measures offered by the Iraqi side? TAS: Openness and transparency are very important. The monetary and economic policies, and the laws that govern foreign companies in any country

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must be clear for all. The other thing is we lack an independent analytical establishment that is able to evaluate the price of the shares or evaluate the stocks like what Standard Report, or the DJ Index do. This is very important because it reflects the quality of the share, so it is not important that the stock market evaluates the share because it is not of its duty, but an independent, impartial economic establishment able to do international evaluation and to provide the type of categorisation – whether excellent, good or bad. On the other hand, there are many interpretations on some clauses of the investment law, from the Central Bank, the Department of Company Registration, and other establishments and laws that deal with investment. When there is a law governing the stock exchange, there must not be any restrictions or barriers – by other jurisdictions – on this investment or, for example, on land ownership. Moreover, all instructions and regulations must be completely clear, as well as adequately and correctly translated from Arabic to English on the same day. These translated instructions can be issued so the non-Iraqi or non-Arab speaking investor will not be lost in translation, something that could ruin the investor’s 83.53 confidence in the economic market or relative laws. For instance, a certain law allows investment, but there are some clauses in the relevant company’s law that bans investment, which ends up being a recipe for disaster. What happened in 2005 and 2006 is that there were some exports approvals, issued by certain laws to encourage investment or mergers, but at the same time there were other laws obstructing the previous ones, and interpretations would take months to clarify. This is pure bureaucracy that we must eliminate.

analysis

Iraqi Foreign Investment Law Analytical preview Has the Iraqi Investment law succeeded in attracting the investments required for economic development? Words: Dr Omar el-Qadhi, PhD Business and Credit Analyst

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ome Iraqi economists and politicians feel suspicious when it comes to the concept of “foreign investment”. This can be attributed to the colonial-era days, when foreign investors transferred the economic surplus from the colonised country to the homeland. The shocking policies which were pursued by the different governments which ruled Iraq since the formation of the state, played a negative role by intensifying Iraqi citizens’ misunderstandings of the concept of foreign investment. During the British mandate and the early days of the Iraqi state, and due to the limited resources, the political system implemented a number of policies to encourage the private sector as well as to attract foreign investments. Those policies succeeded, to a certain extent, in correcting the misconceptions surrounding foreign investment, spreading the concept of market economy among members of society, while enabling lots of private and foreign investments to operate inside Iraq. For example many foreign banks opened up branches in Iraq.

With the beginning of the Republic era, there were a few attempts by some politicians and economists to redraw the public understanding of foreign investment. However, the rise of leftist and social ideology and its broad public acceptance ended all forms of local private enterprises as well as foreign investments, topped off by the issuance of the nationalisation law of 1964. During the period between 1968 and 2003, there were many attempts to attract foreign investments, and Arab investments in particular, to operate in Iraq. Those attempts were in the form of laws and orders like Order 62 of 2002, which resulted in some limited Arab investments with local participation. But these decisions were mainly politically motivated rather than being based on the economic desires to transfer technological knowhow and expertise, or to encourage the freedom of movement of capital to and from Iraq. The Investment Law Number 13 of 2006, by which the National Investment Commission was created, offers the local and foreign investor many incentives, guarantees,

The law bans confiscating or nationalising investment projects

and exemptions.The law bans confiscating, or nationalising investment projects – except in the case of legal violations. The law aims to accelerate the economic and social development, transfer technical experience, develop human resources, strengthen competition, and increase the capabilities of utilising domestic resources. It also gave the foreign investors the right to directly or indirectly trade in shares and bonds of companies enlisted with Iraq Stock Exchange to create an investment portfolio – a sign that there is a unanimous agreement on the political, judicial and executive levels on the great need for these investments. However, there are some flaws in this law, especially the sections regarding the inadmissibility of owning property. Article 11 of the law allowed the investor to lease the land needed for the project for no more than 50 renewable years. This will create an obstacle in attracting investments for some projects, like the housing projects, since the housing companies will not be able to use the value of land as a collateral in borrowing from local banks – which means the handicapping of wealth, from the economic point of view.

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analysis

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The other flaw concerns the referring any disputes to Iraqi courts and under Iraqi laws, as mentioned in article 27, with the complete absence of an option to refer the disputes to international arbitration. This will hurt the National Investment Commission’s ability to attract foreign investments as a result of the lack of clarity in some local laws and the confusion that will result from implementing a number of orders issued by different courts. Not to mention the widely-spread corruption in the government and the possibility that influential political parties or governmental authorities would interfere with the legal system. All of this will make investors less confident in the capabilities and effectiveness of Iraq’s judicial system. The third point is that article 14 has bound the foreign investor to follow Iraqi laws concerning leaves, holidays, and working hours, without mentioning any amendments to comply with labour laws in the country of the foreign investor, or at least the neighbouring countries. The fourth point of concern is the security situation and the effect it has on investment. Many officials have repeatedly declared that protection will be provided to the investing companies, a service they can offer with their own security details after obtaining official permission. But on the ground, the reality is different. It is known to all, through daily observation of the security situation in Iraq, that the foreign investor cannot differentiate between the relatively stable situation in some areas and the daily incidents of violence. Moreover, the permission of foreign companies to hire private security details (PSDs) can be considered a clear admission of the incapability of the government to restore security. Add to that the fact that the costly budgets of retaining PSDs will definitely increase the capital of the investment.

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The foreign investor cannot differentiate between the relatively stable situation in some areas and the daily incidents of violence

Iraq has always been consistently issuing investment laws without a clear vision of the investment climate, creating inadequate regulatory framework for companies looking to expand production. In addition to improving the quality of the supporting infrastructure (financial services, energy, transport, and communication), the proper investment climate should also include overcoming bureaucracy, controlling corruption, and honouring contracts by commitment to completion. The absence of the investment climate in Iraq will deprive the investment companies from the chance to achieve a 30 per cent saving in labour costs, where if the ideal environment is provided investors will expect an increase of 25 per cent in the worker’s added value. Taking into consideration the sector and the volume of the investment, the following factors can be observed for measuring the investment climate: 1.The state and cost of infrastructure. Since Iraq is suffering from deteriorating electricity networks, water supplies and roads, the investment companies will resort to using generators and their own communication systems.This will create a burden on their budget. 2. The laws and regulations governing labour. Labour laws include strict clauses on expelling workers and they lack the minimum requirements of flexibility. This will result in a low level of general productivity, because workers will always feel that labour laws will be protecting them ahead of the employers. 3.The weakness of Iraq’s banking system in modern technology. Modern IT systems to manage banking operations are essential to business transactions.The shortage in qualified human resources and the lack of training in risk estimates and portfolio management are among the many challenges facing the Iraqi banking system.

Investment spotlight

On the right road? By Ghaleb Wiswasee

Of all infrastructure in Iraq, the transport network is one of the most critically underdeveloped. That may be changing as the country seeks to get on the move

Reasons for deterioration The quality and performance of the sector started to deteriorate by the early 1970s, when the Ba’athist regime started importing old, cheap transport vehicles and, despite high oil prices for much of the decade, deprived the infrastructure of the necessary investment. This lead to rapid deterioration and regression of most of the road and rail network. Means of transport failed to keep pace with either modern international developments or the burgeoning population. In addition, the repeated wars the country has been plunged exhausted the economy to the extent that the government was not able to provide the most basic services to the citizens. Imports, other than military hardware, were kept to a minimum, and were related to transport were ordered by officials or committees who lacked necessary qualifications or experience – and were riddled with self-interest and corruption – to make the right choices for the nation. To make things even worse, the international sanctions imposed on Iraq after its Kuwait invasion in 1991 had a devastating effect on the economy and all services. More recently, the pervasive chaos which followed the 2003 US-led invasion (the looting, ransacking, and destroying of all government properties) and all the installations that accompanied it, have left what remained of Iraq’s transport infrastructure in ruins. This makes it, sadly, the most backward country in the region in terms of travel, with its transportation sector in the worst situation in its history.

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AFP

he transportation sector is, unquestionably, one of the most fundamental services to Iraq’s population.With over 29 million people needing to get around on a daily basis, it represents a massive opportunity for investment and growth – not least as it is one area that has suffered from the twin effects of government neglect, placing it at the foot of the region’s transport systems in terms of development and modernisation, and the ongoing security situation. But the country has a long history of integrated transport provision. In 1869, it became one of the first Middle Eastern countries to have a rail carriage pulled by horses, and then was home to the region’s first railroad, the Baghdad-Byzantine-Berlin route, which was constructed in 1911 and connected Iraq with neighbouring countries. As for domestic land transport, Iraq operated fleets of modern tourist buses since the 1930s, and was the first and only Arab country to operate the single and doubledecker buses, built by the famous British Leyland, which were operating until the collapse of Saddam’s regime.

The ministry also signed a contract with an unnamed South Korean company to provide 39 buses to be used for domestic transport inside Baghdad, which suffers from insufficient public transport vehicles and outdated private buses. Another contract was signed by the General Company for Passengers Transportation with Hyundai, also South Korean, to provide 130 tourist buses.The deal was signed when the company’s director, Osama al-Sadr, visited the Hyundai factories in Seoul last month. In another area, the Mayor of Baghdad, Saber al-Issawi, announced that the long-delayed Baghdad underground project is still ongoing. In his press conference, the mayor claimed that “17 international companies expressed their wish to participate in this project, but Baghdad Governorate selected only seven to bid for the $3 billion project”. He also said that “the underground, the first in Iraq, will consist of two lines of 20km, which will ease the cumbersome

The ministry is taking steps in rehabilitating the western network

Facts The first train to be operated inside Iraq was Baghdad-Dujail in 1914. First train between Iraq and Turkey operated in July, 1940. There are currently 1,910km of main tracks and 362km sub-tracks. There are 11,034km of total paved main roads in Iraq. There are total 28,975km of secondary roads.

Foreign investment in 2009 and beyond The Ministry of Transportation, like all the other ministries, started a campaign to rebuild and develop the transport infrastructure of the country. It is encouraging foreign investors to enter the Iraqi market, and many international companies have responded to their invitation by bidding for various projects all over the country.The transport sector is now a major arena for international competition. A press release by the Transport Ministry said that 55 investment contracts have been completed since the beginning of 2009, composing of operational deals and investment plans. Looking ahead, Minister of Transport Amer Ismaiel met a group of Italian companies along with Iraqi private investors, to discuss developing the Fao port in Basra, which will be built in two stages, the first of which will cost around 2 billion Euros. In his press briefing, Ismaiel reaffirmed “the importance of this strategic project, which will boost the national economy in general, and the transportation sector in particular, and provides thousands of jobs to Iraqi youth.” The minister also added that “not only Iraq will benefit from this project, but the whole world will, as it will connect Iraqi and Gulf ports with the Mediterranean”.

traffic jams from which Baghdad streets and commuters are suffering.” The seven companies will have until January 2010 to submit their bids and a technical committee will be formed to review and select the winners, the mayor added. Away from the roads, German Duetsche Bahn intends to participate in building the Iraqi railroad system. A delegation visited the country last month and held talks with Rafi Abbas, Director General of the state-owned General Company for Railway, who stressed on “the necessity of rehabilitating all railroad networks in Iraq for its importance in the revitalising the economy.” He also added, “The ministry is taking steps in rehabilitating the western network to a modern one which will connect all cities in western Iraq, and Iraq with the neighbouring countries.” Recently, an Iraqi official close to the PM said that the Iraqi government has succeeded in attracting more than $100 billion from foreign investors to execute reconstruction projects in Iraq. PM Nouri al-Maliki said in London’s “Invest Iraq” conference, held on April 30th, that “all circumstances are provided to start investment projects in Iraq by foreign companies, and the Iraqi government will do everything to help and assist these companies in carrying out their projects and protecting them.”

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