UAE accounts for lion's share of investments in Iraq

UAE-based companies and funds are the largest investors in Iraq by value, having committed more than $31 billion (Dh113.8bn) since 2003, representing 50 per cent of all investments in value terms, data released this week has shown.

Most of these projects were announced in 2008, the same year that the UAE forgave $7bn of Iraqi foreign debt and reopened its embassy in Baghdad, making it the first Arab country to reopen a permanent presence in the nation, according to research by Dunia Frontier Consultants, a firm based in Washington DC, and Dubai.

"We will see a continued and increased proportion of regional money enter into Iraq for the first time in 2009 as regional firms and funds rebalance their investments towards primarily regional ones," Dunia said.

"As the robust number of regional firms with significant amounts of dry powder start to redeploy their capital, the paucity of viable opportunities within the GCC will force a number of them to take a closer look at opportunities within the 'edge' economies of the Mena region. Dunia expects this will cause disproportionate benefits to the Iraqi economy."

Dunia estimates private foreign investment in real estate will continue to grow robustly, with estimated upper-range investment of $35bn in 2009 and $40bn in 2010.

This is based on the expected construction of 350,000 new housing units in 2009 and 400,000 units in 2010 with an average investment of $100,000 per unit coupled with a severe decrease in viable real estate opportunities in the GCC region over the same period.

Similarly, investment in the oil and gas sector is expected to increase to $24bn this year and $48bn the next.

Growth in other sectors of the Iraqi economy is estimated to be a simple average of the growth rates in real estate and oil and gas, or just more than 50 per cent per annum in 2009 and 2010.

In February, at least $618m in investor capital has been announced for real estate projects across Iraq; these investments have a much wider geographical footprint than before, with investors seizing on previously overlooked opportunities in north-central and south-central Iraq. "The provincial elections that took place on January 31 point to a strong and continued showing by Prime Minister Nuri Al Maliki's Dawa party and his governing State of Law Coalition, auguring positively for a stronger central government and greater political stability in Iraq; barring any wide scale breakdown of relations with the Kurds," Dunia said.

"Combined with national elections scheduled for the end of the year, a steady drawdown in US troops, and relatively strong real GDP growth forecast, 2009 should be an important year for investment in Iraq."

Since April 2003, more than a hundred private investors domiciled in 26 foreign countries have announced projects in Iraq. UAE investors have the lion's share, accounting for $31bn in investments across eight mega-projects, or 50 per cent of total project value.

Private US companies are in second position with more than $10.2bn invested since 2003. "However, this total includes more than $9.8bn in EPC contracts awarded by US Government agencies to US companies in 2003 and 2004. Following this initial US-dominated reconstruction phase, US private investors have become negligible players in Iraq," DFC said.

UK private investors are in third place, having invested some $6bn across six mega-projects since 2003.

Sectoral view

Sixty-eight investments in Iraq's non-oil economy accounted for 71 per cent, or $45bn, of total invested value in the country since April 2003. Within the non-oil economy, comparatively minor investments totalling $11bn, were made in the manufacturing, ICT, utilities and financial services sectors. However, 'mega' projects in real estate dominated investment in Iraq.

Iraqi residential and commercial real estate has attracted more investment since 2003 from private overseas investors than any other sector. In all, 20 outside investments worth $33.5bn have been announced in the Iraqi real estate sector since 2003, representing 20 per cent of all projects but 53 per cent of total invested value. Two massive projects by Damac Properties and Al Maabar (both UAE) accounted for 75 per cent of all investment in Iraqi real estate. Meanwhile, US investors Summit Global Group announced a high-profile $100m investment in a new five-star hotel in central Baghdad.

"The real estate investment boom looks set to continue into 2009, with $620m in foreign-backed real estate announced in January alone," DFC said.

The oil and gas sector in Iraq attracted an estimated 27 investments since 2003, with a total value of $18bn, or 29 per cent of all private foreign investment in Iraq by value.

These have taken three main forms since 2003: service agreements, or SAs, between US EPC firms (Bechtel, Halliburton-KBR etc) and US government agencies; SAs between oil and gas companies (Shell, CNPC, Weatherford etc) and the Government of Iraq; and full exploration and production sharing agreements, or EPSAs, between independent oil 'juniors' and the Kurdistan Regional Government (KRG), several of which have been deemed illegal by the Iraqi Government. "Despite Iraq's hosting of what are believed to be the world's second largest crude reserves, investment in Iraq's oil and gas sector has been subdued since 2003. Large amounts of investment are expected as a result of Iraq's current and future oil field bid rounds, but the bid processes have been rife with international oil companies (IOCs) skepticism and concern," Dunia said.

Aside from continuing security concerns and political instability in Iraq, IOCs reticence to enter the Iraqi market is the result of several additional factors.

First, most IOCs are waiting until the conclusion of the Phase 1 bidding round before jumping fully into the country, while only a fraction have already made a decisive move into Iraq.

Second, the "continuing constitutional, legal and regulatory uncertainty" surrounding the respective authorities of the KRG and the Iraqi Government to conclude SAs and EPSAs with international firms is causing IOCs to hold back, particularly in the KRG region. Third, the lack of passage of the national draft hydrocarbons law, revenue sharing law, or potential Iraqi National Oil Company laws, and "concomitant lack of an updated legal basis" on which IOCs can do business in Iraq, has precluded many firms from entering the Iraqi market.

Fourth, amid continuous restructuring in the Iraqi Ministry of Oil, IOCs are waiting to see if the government decides to spin off any new provincially-based oil firms from the North Oil Company or South Oil Company (SOC), similar to the recent spin-off of the Maysan Oil Company (MOC) from SOC. It is currently expected that new spin-offs are in store in Dhi Qar and potentially other areas.

Equity ventures

Private companies domiciled outside Iraq invested a total of $40bn in Iraqi equity ventures (64 per cent of total); $11bn in oil and gas service agreements (18 per cent of total); at least $8bn in the form of EPC contracts awarded by either the US Government, Iraqi Government or Kurdistan Regional Government; and $3.5bn in the form of EPSAs with the KRG (six per cent of total).

The average project size (to include shares of all foreign participants in the case of JVs) was $700m, while the median size was $105m, indicating that the distribution was skewed by several massive projects.

Just 13 projects – each in excess of $1bn – accounted for 81 per cent, or $51bn, of total invested value between April 2003 and February 2009. A total of 33 intermediate-sized projects in the $100m-$1bn range accounted for 17 per cent, or just more than $10.5bn, of total invested value. At least 44 projects in the sub-$100m range represented just two per cent of total invested value, at just more than $1bn.

In 2008, the pattern of investment in Iraq pointed to the relative attractiveness of the far north (Kurdish provinces of Erbil, Dohuk and Suleimaniyah), the far south (Basra province) and the capital (Baghdad province). Combined, these five Iraqi provinces attracted 84 per cent, or $53bn, of all private foreign investment since 2003.

"Although these figures suggest a high level of regional concentration, investment in Iraq is no longer a tale of the Kurdish north versus the rest of the country. Amid improved security in 2008, Baghdad and Basrah attracted an increased level of outside investment," Dunia said.

The phase of investment flows after 2007 saw a gradual rebalancing of investments across the country in parallel with increasing stability in the second half of the year, followed by an acceleration of this trend in 2008.

"However, it should be noted that this proportional shift essentially reflected a handful of major real estate and oil and gas SAs in Baghdad and Basrah," Dunia said.

"While all of Iraq is ripe for investment, except potentially Mosul and Nineveh, private foreign investors have tended to give the mainly non-oil provinces of north central and south central Iraq an especially wide berth.

"However, an incipient trend toward greater outside investment in Iraq's hitherto overlooked non-oil provinces is at hand."


Three phases

The $63 billion (Dh231bn) in foreign investment that has been announced in Iraq since April 2003 has been characterised by three major phases:

- Phase I, corresponding roughly to the first year of the US military presence in Iraq (2003-2004), saw foreign investment dominated by large lump-sum oil and gas service agreements (SAs) and engineering, procurement, and construction (EPC) contracts for major infrastructure work awarded by various US government agencies to US companies. These companies included Halliburton-KBR (KBR was spun off in 2007), Fluor, Parsons and Bechtel. 

- In Phase II, corresponding to the highly unstable 2005-2007 period, foreign investment in Iraq declined economy-wide in absolute terms, from $6.7bn in 2004 to $1.2bn in 2005. Total investment ticked upward in 2006 to $5bn. However, this largely reflected a single $4bn investment announced by Anglo-Kurdistan (UK) in Kurdish real estate. Iraq attracted just $2.7bn in 2007, reflecting a major $1.2bn investment by Merchant Bridge (domiciled in Luxembourg; head office in London) in the information and communications technology (ICT) sector in the Kurdistan Regional Government (KRG), and several smaller exploration and production sharing agreements (EPSAs) signed by Western international oil companies (IOCs) in the KRG. 

- In Phase III, corresponding to 2008, foreign investment in Iraq surged by nearly 1,500 per cent year-on-year from 2007, increasing from $2.7bn to $42.9bn in 2008. This increase was concentrated in the oil and gas and real estate sectors. The rest of the Iraqi economy, with the exception of manufacturing, witnessed a net decline in foreign investment. The major investments in the oil and gas sector included a slew of EPSAs between the KRG and several Western oil 'juniors' in Q3, and the conclusion of a $3bn SA for the Al Ahdab field in Wasit province. The major announcements in the real estate sector included Al Maabar's $10bn investment in Baghdad and Damac Properties' $15bn investment in Erbil.