Infrastructure

freewayInfrastructure

Imagine a country nearly twice as large as the United Kingdom…broken. Imagine a population of over 30 million people living without basic services such as clean water, electricity, trash pickup, sanitation, fire protection, reliable roads, health care and security.

We’re not talking about Somalia or Yemen or any of the other African countries in crisis, we’re talking about Iraq as it was in 2003.

Iraq, prior to the mid ‘80s, had one of the most extensive and modern infrastructures in the region but years of war, sanctions, misdirected resources and a rural to urban migration  resulted in a country that was nearly dysfunctional.

So what does it cost to fix a broken country?

No one has an absolute answer but it’s safe to say…it’s going to cost a lot.

The (newly paved) Road to Recovery

The state of Iraq’s infrastructure today depends on where you look. Conditions have improved dramatically nationwide over those that existed in 2003 but the improvements were not implemented universally and in some places access to a specific infrastructure, like water, has declined. In Bagdad the services you receive can be a question of which block you live on. In short, Iraq still has a long way to go to arrive at service levels that existed 30 years ago.

Of course this is great news for anyone who provides infrastructure or invests in those who do. Since 2003 nearly $130 billion has been spent (mostly by the United States) on infrastructure ranging from roads, to schools, to water purification to health clinics and more. Construction companies, both domestic and international, have experienced three boom years thanks to the country’s spending on infrastructure.

And there’s more to come.

Part of the delay in getting projects completed is the sheer number in the pipeline. Currently there are contracts signed for $34 billion and there simply aren’t sufficient resources to accomplish them simultaneously. In addition to existing projects, the Iraqi cabinet has drafted a plan to spend an additional $31.5 billion on infrastructure and has forwarded it to Parliament for approval. The plan includes:

  • $10 billion for transport infrastructure and $1.5 billion for highways
  • $5 billion on education
  • $5 billion on water a sewage treatment
  • $5 billion on agriculture
  • $3 billion on health
  • $2 billion on higher education

The challenge of course will be getting Parliament to pass the plan into law. Sectarian politics plays an unfortunately large role in the central government. Consequently, anything received from Prime Minister Maliki’s cabinet will initially be opposed by Maliki’s political opposites.

Massive Demand, Massive Spending, But Can It Continue…

Iraq’s budget for 2012 is an even $100 billion which is a 21% increase over 2011. This year’s budget includes $30 billion for infrastructure investments and that number does not include electrical power projects which has its own allocation of $5.6 billion. This is a country that is serious about rebuilding and this is a country that appears to have the cash to pull it off.

But there are challenges.

Oil revenue is what allows Iraq to fund its recovery contracts. The budget was created using $85 per barrel to project total revenue and at the time that price seemed to be a safe, conservative number.  Unfortunately the price of oil softened in May and ran at under $85 for nearly 3 months. The lesson learned is that oil prices cannot be reliably predicted and Iraq needs to diversify its economy to lessen the reliance on petroleum.

But as bothersome as the fluctuating price of oil is, there is a larger and potentially greater challenge to infrastructure recovery that comes from the government of Iraq itself. Sectarian politics is creating turmoil and contentious relationships at the highest levels of government most notably between Prime Minister Maliki and the Kurdish Regional Government (KRG).

Disagreements regarding the allocation of oil profits led to the KRG suspending oil production briefly. It has threatened to again turn its wells off if the central government doesn’t pay what the KRG feels is its fair share of the revenues.

The inability of the parties to compromise can lead to a disruption of the nation’s leading source of income and delay the passage of much needed business reform legislation.

You Have to be Iraqi to Understand This

The central government encourages foreign investors to partner with Iraqi companies when submitting proposals for any government project. While the motivation for this encouragement might appear obvious, get infrastructure dollars to domestic companies, there is another, far more practical reason the government wants Iraqi participation in a contract let to a foreign company.

Iraq lacks the government expertise normally associated with project management. Getting an investment license for a foreign corporation or a building permit for an Iraqi citizen can be a lengthy and uncertain exercise unless…you have an Iraqi company who has been doing it for years as your guide.

Because there are no universal regulations it is essential to understand the nuances and dynamics of the local investment commissions and suppliers in order to conduct business in a profitable manner. Partnering with an Iraqi firm who understands the realities of the construction business in Iraq can make life far less complicated.

Fortunes have, and continue to be, literally built on the Iraqi redevelopment program but the most successful contractors are those with superior local intelligence and the ability to adapt to changing conditions.

If you’d like to learn more about the opportunities that Iraq’s infrastructure program offers please feel free to contact us and we’ll share our take on the risks and benefits that currently exist.