The Iraqi government is keen to invite foreign investment into the power sector. With demand estimated at between 8,500MW and 9,000MW nationwide, and supply into the national grid averaging just 5,400MW over the first four months of 2009, generation is in need of a considerable boost. The Iraqi government is trying to address the problem, and has pledged to install up to 30,000MW of generating capacity. The Iraqi government is keen to invite foreign investment into the power sector. With demand estimated at between 8,500MW and 9,000MW nationwide, and supply into the national grid averaging just 5,400MW over the first four months of 2009, generation is in need of a considerable boost. The Iraqi government is trying to address the problem, and has pledged to install up to 30,000MW of generating capacity. | Well Short Of Demand | | Iraq - Electricity Supplied To National Grid | |
| | Source: BMI, Brookings Institution |
Baghdad has made deals with GE Energy and Siemens for the delivery of turbines with a combined generation capacity of 10,150MW, but the government has yet to make plans for the installation and commissioning of these turbines in power plants. Moreover, as Baghdad has been forced to slash its 2009 capital expenditure budget (due to low oil prices), it is now looking for increased foreign involvement in the process. Although overseas contractors will be wary of entering the power sector at this stage, some progress is being made. In May, Iraq signed a US$120mn deal with Pratt & Whitney to build a gas power station with a capacity of 180MW in Missan province. The follows the announcement in January that the company had won a US$70mn contract to supply gas turbines. The structure of this deal is unclear. However, BMI understands that the model the government intends to use for Independent Power Production (IPP) contracts is still in the works, and so companies are likely to prefer engineering, procurement and construction (EPC) contracts for now. Indeed, EPC contracts would commit companies to Iraq for a shorter time period, and the financial risk is lower (though not negligible) as the government will guarantee payment. | Instability Hindered Investment | | Iraq - FDI Inflows (US$mn) | |
| | Source: BMI, UNCTAD |
Iraq's reconstruction and economic development will require hundreds of billions of dollars of infrastructure investment and Baghdad hopes that foreign partners will play a sizeable role. We would therefore expect to see a number of major deals over the coming years such as the one announced in April, whereby Iraq entered into an agreement with an Italian consortium to construct a US$3.7bn port close to Basra in the Gulf. Infrastructure projects will likely be principally directed towards supporting the oil and gas sector for now, but over the longer-term, broader-based projects are likely to also take off. But Challenges Abound Foreign investors are likely to find that doing business in Iraq is going to be challenging for several years to come (at least), and there will be a reluctance among many to be first (or early) movers. The challenges are reflected in our proprietary business environment ratings, where Iraq scores a low 23.5 (159th out of 167 countries we rank), with this score weighed down by a very poor score of 18.9 (160th) in the 'infrastructure' sub-component. That said, the other main sub-components do not paint a much better picture: 'institutions' score 25.7 (149th) and 'market orientation' scores 25.9 (155th). Three particular issues stick out for attention. Firstly, there is the problem of governance. Institutional infighting, competing local vested interests, and an inefficient bureaucracy has meant that the investment process has heretofore been excessively time-consuming and frustrating. This was acknowledged by Deputy Prime Minister Barham Saleh, who stated at the recent Invest Iraq conference in London: 'The number one issue for investors was the legislative environment and some of the bureaucratic impediments that an investor would have to deal when they contemplate working in Iraq.' In order to cut through the cumbersome bureaucracy, the government recently formed the National Investment Commission, which it intends to act as a 'one-stop shop' for foreign investors. | Still Bottom Of The Class | | Transparency International's Corruption Perception Index (out of 10) | |
| | Source: BMI, Transparency International |
Secondly, and related to the first point, corruption in Iraq is high. According to Transparency International's 2008 Corruption Perceptions Index, Iraq comes in 178th out of 180 countries surveyed. A degree of corruption can certainly grease the wheels of commerce in the early stages of a country's development, and oil companies in particular have investments in countries where perceptions of corruption are high. However, endemic corruption will likely act as a hindrance to investment over the longer-term. Thirdly, the shallowness of the domestic financial services sector threatens to act as a major impediment to investment. In Iraq, housing banks or mortgages do not yet exist, so even though the government is keen to encourage investment from foreign property developers to help remedy the country's housing shortage, these investors will no doubt have reservations. As another example, the underdeveloped banking system means that many Iraqi would-be importers may struggle to secure trade finance, without which potential export partners are just not going to be interested. Consequently, economic development will be hampered unless Iraq rapidly builds up its financial infrastructure. Baghdad has been keen to lay down the welcome mat to foreign companies, hopeful of securing a 'peace dividend'. We do see investment picking up over the coming years, but serious impediments clearly remain. |