Is Iraq ready for American investors?

At the end of her speech to more than a thousand US and Iraqi businesspeople packed in a hotel ballroom, Secretary of State Hillary Rodham Clinton threw an American spin on an Arab proverb: “Dawn does not come twice to wake a man – or a woman.”

Her point? It’s time to invest in Iraq.

It sounds crazy. Though the violence has ebbed, terrorists still make their presence felt with deadly attacks. Challenges – from dividing oil revenues to the future of the northern city of Kirkuk – threaten to split the country. Even if Iraq hangs together, it faces a daunting to-do list of reforms before it becomes a place many foreign businesses would set foot in.

Yet, like Secretary Clinton, some consultants and more than a few US businesspeople are making the case for Iraq: This uncertain period is precisely when foreign companies can reap the biggest gains.

Bob Flavell had heard the same hype, but he wanted hard data about sales prospects for his company, Base 1 Welding Supply. When he asked an Iraqi trade official for it, Mr. Flavell was floored. “The numbers he was talking about, just for our product line, would exceed all of what California exported all of last year to Iraq,” Flavell says. “Those are big numbers.”

Iraq, to put it mildly, needs everything: more than 2 million housing units, half a million hospital beds, seemingly endless technology and know-how for an escalating oil and gas extraction industry, the rebuilding of the nation’s once-robust education system from top to bottom.
Iraq optimists cite four reasons why it’s a great time to invest:

1. A ground-floor opportunity

Coupled with a population that is both highly educated for the region and sitting atop the world’s third-largest reserve of oil, Iraq is “one of the last great ground-floor opportunities in the world,” says Paul Brinkley, an undersecretary of defense and the director of the Task Force for Business and Stability Operations in Iraq.

After years of economic stagnation brought on by international sanctions, Iraqi appetite for new consumer goods is boundless, says Khalil Urfali, an Iraqi-American whose Atlanta-based firm exports personal-hygiene products. “What they need, you cannot imagine.”

“I am going into a market where I already have 18 competitors. But the market is so huge and it’s seen absolutely nothing” due to sanctions, he says. “The issue is not if it’s going to sell,” just how long.

2. Improving business climate

When Hussein Qaragholi first traveled to Iraq in 2003 for the Abu Dhabi Islamic Bank, he put an Iraqi bank through a simple test. He asked a bank teller what she would do if someone wanted to deposit a large amount of cash. “Do you ask them where this money comes from?” Mr. Qaragholi asked. Her reply? “ ‘Sir, that would be very rude.’ ”

But recently, after he contacted a potential Iraqi banking partner, Qaragholi said it sent his bank a questionnaire about its anti-money-laundering practices.

Other developments are brewing. One is a “one stop shop,” promised by Iraq’s National Investment Congress. The shop will provide a single portal for businesses interested in opportunities in Iraq, explaining regulations and procedures for all sectors of the economy. Legislatively, a package of tax breaks, including the elimination of fees on imports for three years and an easing of restrictions on land ownership, are already in place.

As the legal infrastructure improves and the political situation remains largely stable, groups are more likely to offer political risk insurance. The lack of such insurance is a key barrier to investing in Iraq, said several US executives who gathered in Washington, D.C., in October to attend the US-Iraq Business Investment Conference, where Clinton spoke. The availability of political risk insurance could push American investors to take the plunge – even if they don’t eventually opt for that coverage.

“Insurance might get that investor or lender interested and on the plane … and then maybe they get into a project and there’s no need for OPIC,” says John Moran of the Overseas Private Investment Corp., an independent federal agency that offers the coverage.

3. Native entrepreneurial spirit

American businesses may find glimmers of hope by looking at the entrepreneurial behavior of Iraqis themselves, says Allen Collinsworth, general manager of Fara Resources, a construction company based in Istanbul, Turkey, that has worked on several projects in Iraq.

“What we have to look for are those nascent signals of democracy and grass- roots private sector development,” he says. “The guy who goes out there and starts a fish farm off the Euphrates – I’ve seen it. The farmers who get together and say: ‘Let’s get our fields together and achieve some economy of scale’ – that’s going on. The women who are entering into the workforce. These are the kinds of trends that are too often understated.”

Iraq doesn’t have to be perfect to attract foreign investment. “I don’t think we’re trying for a democratic example of an ‘A-plus’; a ‘C-minus’ or a ‘D-plus’ would be fantastic,” says Mr. Collinsworth. “We need something where everyone sort of goes and says, ‘Well, it’s not as good as we hoped it would be, but we can live with this.’ ”

4. Foreign rivals

While Iraq may be a great ground-floor opportunity today, a flock of foreign companies are looking at the same numbers that US firms are.

During a visit to Iraq in 2008, Skip Schaum, CEO of Newport Global Technologies, was dining at Baghdad’s Palestine Hotel near a table of seven Chinese businessmen. “All were under 40; all spoke perfect Arabic, English, and Mandarin,” he says. China’s American competition “does not sound like that.”
Beyond cultural skill, many foreign companies have longstanding connections with Iraq, making them more attuned than Americans to the nation’s business rhythms.

“There are lots of people in the surrounding countries and in Europe who understand the requirements of that country and who have worked there or have at least more of a realistic view into the country’s requirements than American companies do,” Mr. Urfali says.

The critics’ rejoinder

But timing is key, Iraq skeptics point out. It’s no use getting in on the ground floor if the superstructure is going to crumble. The immediate danger: an Afghanistan-style debacle during the national elections tentatively scheduled for January. While violence has ebbed to levels unseen since 2003, a conflagration surrounding the elections or the election law would shatter investors’ confidence.

In the longer term, the passage of a law governing how Iraq will distribute its energy wealth and political compromises regarding questions of Kurdish autonomy for Kurds and the future of the city of Kirkuk are all pressing concerns.

Then there are business reforms. Transparency International ranked Iraq 176 in its annual Corruption Perceptions Index, on par with Sudan. Only Burma (Myanmar), Afghanistan, and Somalia placed lower. While Iraq has begun the long road to joining the World Trade Organization, the current legal and regulatory frameworks in place “too often remain restrictive, non-transparent, and out of line with international best practices and the principles of the rule of law,” according to the US Agency for International Development’s 2009 economic progress report on Iraq.

A Brookings Institution report was even more pointed: “Iraqi reformers, for all their heroic efforts, have been unable to send credible signals that Iraq’s investment climate is being improved,” wrote nonresident senior fellow Raji Desai.

Until government ministries stop treating private corporations as subservient to the bureaucracy, streamline investment laws, and strengthen unemployment protection, the country will remain more problematic than it’s worth for investors, Mr. Desai argues. “Without a functioning system of unemployment insurance, allowing foreign investors to buy companies and fire workers would be political suicide for any Iraqi government,” he writes.

Companies, especially large ones, also worry about Iraq’s labyrinthine and inexperienced judicial system.

These problems don’t deter the optimists. After six years of Iraqi and US sacrifice to stabilize the nation, the prospect that non-US nations might take the best advantage of Iraq’s potential is wounding to Americans and Iraqis alike.

“After the United States came to liberate Iraq and after Iraqis have given the ultimate price to get rid of the dictatorship, it’s just fair that we build the relationship economically,” says Namir Jumaili, marketing director of Al Juthoor, a construction firm in Anbar Province that has worked with the US military. “We had the military bang. We had the security bang. Now we need the economic bang.”

It may be coming. Newport Global got a contract in July to build a sports complex in Basra. “We’re already talking about other sports facilities and the fact that we’re there gives us a leg up,” Mr. Schaum says. “This isn’t the last stadium that will ever be built in Iraq, that’s for sure.”