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Report from the Iraq Commercial Investment Summit
Source: BI-ME , Author: Trevor Lloyd-Jones
Posted: Mon April 21, 2008 12:00 am

IRAQ. Multinationals and Arab companies from wide-ranging fields including engineering, cement, construction, project management services and manufacturing had the opportunity to meet with senior officials from the Iraqi Ministry of Industry & Minerals and director generals of over 45 state-owned enterprises in Dubai this week. The development of Iraq’s all-important engineering and oil services industry as well as overcoming the media stereotypes of the country were among the main themes.

Iraq’s revitalisation of its formerly prized industrial sectors took a leap forward this week with behind the scenes negotiations as well as presentations from the conference floor at the Investing in Iraq’s Industry Sectors Summit held in Dubai on 19-20 April 2008.

Speaking to BI-ME on the sidelines of the meeting, Iraq’s Minister of Industry & Minerals HE Fawzi Hariri, said that the country’s programme to rebuild the state manufacturing sector had gathered significant momentum since last August.

At the close of the conference, Hariri was a signatory to two contracts for new private-public partnerships in the cement sector, for Al Kirkuk Cement Company and Al Qaim Cement, both plants within the Iraqi Cement Company. These are the first two companies to move ahead with such production sharing agreements that will eventually see all of Iraq’s 45 SOEs (state-owned enterprises) taking onboard new private partners.

The Ministry of Industry & Minerals owns 60 companies with 240 factories in sectors ranging from construction to pharmaceuticals and textiles. It is hoping to attract as much as US$2 billion of private investment into Iraq's cement, iron, steel and fertiliser industries this year. In just one example, leading players such as Egypt’s Orascom, France's Lafarge and engineering group FLSmidth are among at least five companies that have been vying to renovate cement plants in Iraq at a cost of US$500 million.

"We are making all of Iraq's state-owned enterprises available for partnerships with the private sector," Hariri said. Asked about whether the security situation was still at the early stages to enable the flow of investment to go ahead, the Minister said that the challenges within Iraq were still considerable, but on the other hand the rewards were sufficiently high to attract international companies.

“For the last three to four years, there has already been a stable market in the North, and recently we have had a positive indication that these Northern business ventures are moving into Baghdad,” Hariri said.

“We have signed two very important contracts today for the cement industry, whereas in fact following the meetings of the past two days, I could have signed ten other similar deals,” he said. “But as a government body the rule is that the Minister cannot just come and sign a contract. It has to follow due process in Iraq. But we have signed these cement contracts within ten months, which is fast for Iraq.”

The Minister said that other contracts for a range of sectors will be signed in the next 90 days for “hundreds of millions of dollars” which will be part of a process of transition and modernisation for these important industries, up to the year 2012. Importantly he confirmed that the companies taking up these early partnership or revenue sharing agreements, will have first right of refusal on eventual privatisation.

Al-Hariri added that the Iraqi government is serious about providing incentives to investors to operate across Iraq, and that a great deal of interest has been expressed by foreign companies, particularly from Iran and Turkey.

Regarding investment in Iraq, the Minister said that an investment board had been established to oversee foreign direct investment into Iraq and the development of the SOEs. He said that this board represents a “real and new change in the Iraqi economy,” and that it would work to streamline decision making by ministries and the granting of permits.

"The Ministry has activated the Companies Law No 22 for the Year 1997 which permits the Iraqi companies to enter into partnerships with foreign counterparts according to the principle of participation in production, as has happened with the cement plants of Al Qaim and Kirkuk where foreign firms were allowed the opportunity to rehabilitate and develop the plants to work maximum capacity”, he said.

With no privatisation law at present and seeking to avoid the short-sharp shock (and resulting unemployment) of full privatisation, the government of Iraq has drawn up a solution to the problem of attracting foreign investment by offering foreign firms production sharing agreements. Foreign companies invest in industrial infrastructure in return for a share of the profits from the goods sold, in theory raising productivity, bringing in new technology and international standards.

“We are in talks with everyone, with companies from many countries,” Hariri said. “But most people are waiting for oil and gas.” As an example of an international company partnering with an Iraqi company, with the essential components of training and helping to raise the capability of the Iraqi workforce, Hariri mentioned that Shell is in talks with Iraqi state companies to use their oilfield services and project management expertise in the bidding for oil contracts.

In the oil and gas area, he said that three bids had been submitted for regeneration of the important Basra Refinery. One of these he said was for a phase two development of the existing refinery at a cost of US$100 million to US$150 million. But another proposal involves upgrading the whole site with a capacity of one million tonnes of oil derivatives per year.

Concrete plans

The constant flow of trucks and building materials into Iraq at the moment, from Turkey in the North and from Basra port in the South, illustrate the increasing hunger for all kinds of industrial products. The country is undergoing a construction boom, fueled in part by more than US$20 billion in reconstruction money that has poured in since 2003.

Cement is in extremely short supply because it's required in nearly everything being built in Iraq, including roads, houses and apartment complexes.

Most of Iraq's 13 state-owned cement plants creep along at about 25% of design capacity, or they're not operating at all. The industry suffers from the same problems that plague the rest of the country's aging infrastructure. The shortage has sent cement prices skyrocketing. Since 2003, the cost of 1 ton of cement has zoomed from about US$20 to about US$125. That's a stunning rise in a country that once had such an abundance of raw materials to make cement that it exported it.

Salah Kambour, Director General at the Iraqi Ministry of Industry, doesn't have a precise handle on the level of demand because he doesn't have any “real figures or statistics.”

“We are importing cement from everywhere,” said Kambour. “We are bringing it from Turkey, Lebanon, Egypt, Persia, from Kuwait and from China. So from everywhere cement is coming to Iraq.”

Kambour said that if the security situation improves, demand could rise to 30 million tons per year. By contrast, the most Iraq's cement plants can produce by operating at 100% capacity is 15 million tons per year.

The involvement of new partners could be a key to turning the situation around. Kambour said the investors will receive 45% ‘ownership’ in the two cement plants in exchange for capital, expertise and equipment. The remainder will be owned by the government, stock market, workers and state-run companies.

“One of the most important things here is to bring electricity to the plant by buying generators,” he said. “We hope to also get the know-how to reach very soon the production capacity, or 95% of the production capacity, so the dire need of cement in Iraq could be satisfied.”

Speaking on the sidelines of the conference Paul Brinkley, the US Deputy Under Secretary of Defence for Business Transformation based in Baghdad, said that Iraq was now in a much better position to confidently negotiate such deals for bringing in new investment.

“We are really seeing a groundswell at the moment. It is leading edge, and it is the most risk-oriented investors that are coming in. In the last two days we have seen serious, protracted discussions in the multi millions of dollars, and these developments speak for themselves. Today the evidence is that Iraq is open for business," he said.

Andrew Wylegala, a commerce official at the US Embassy in Baghdad, said the sooner business reforms come, the better, so Iraqis can pick up where the US reconstruction projects leave off.

“Clearly the private sector is the way forward,” Wylegala said. “The work that has been done through official funds and through reconstruction efforts…has made good headway in setting the stage so private-sector players could come in and continue the job.”

The Ministry of Industry seems to be in the lead in encouraging private investment. In addition to the two cement plants, the Ministry has attracted investors to bid on 20 new, privately-owned cement plants over the next three years. The investment, according to the US Embassy, will come from international and Iraqi investors, who are expected to pledge US$3 billion toward the plants.

One-of-a-kind opportunities

The feedback from the conference was that the opportunities being offered in Iraq are certainly on a scale and with an upside that is probably unique in the world. The main challenges for the new investors in Iraq will be the ability to connect these former state institutions to a new market structure or supply chain that as yet doesn’t exist in Iraq. Other issues of over-staffing, reliance on old technology, the slow process of government procedures, and the existing limitations (and small scale) of the current Iraqi private sector will also have to be dealt with.

Hosted in formal partnership with the US Department of Defence Task Force for Business Stability & Operations and the American Chamber of Commerce-Iraq, and managed by Iraq Development Program, the Summit was held on the instruction of Iraqi Minister of Industry & Minerals HE Fawzi Hariri.

Minister Hariri was joined by director generals from Iraq’s leading and most lucrative state-owned enterprises, which include the state companies for construction, cement, glass & ceramics, iron & steel, mechanical industries, automotive industries, engineering, heavy engineering, information systems and electrical industries. Altogether a delegation of 85 Iraqi ministers and managers were present at the Shangri-La Hotel in Dubai for the Summit.

Dr Hamoudi Abbas Hameed, Director General for Food & Pharmaceutical Industries, said that Iraq is a major food consuming nation in the Middle East, but local production does not meet 20% of the current demand, despite the former good reputation and good standing of Iraqi brands.

Discussing the leading Iraqi pharma companies Sammara and Nainava, and other companies under his management such as State Company for Sugar Industry, State Company for Vegetable Oil & Detergent Industries or the State Company for Dairy Products, Hameed said that the output of vegetable oils and detergents covers only 20% of requirements specified by the Ministry of Trade. Some 300,000 tonnes of vegetable oils were imported into Iraq last year, as well as 140,000 tonnes of detergent and 70,000 tonnes of soap.

Explaining the current market position, he said that with raw milk available locally and cheap labour there is a good opportunity for dairy plants like the Abu Ghreab factory, the baby milk plant, the Mousel or Al Qadisia plants to return to full production.

“We have a new plant for producing milk with capacity of 10 tonnes per day,” he explained. “Projects like this will be very important in the future. We need ten times this quantity to meet the demand.”

Another company in the sights of the early entrants to the Iraqi manufacturing sector is the State Company for Tobacco & Cigarettes Industry, which is currently producing 0.5 million cartons of cigarettes per year, at a time when the demand is for 3.5 million cartons. “There is room for expansion in this plant,” said Hameed.

Regarding the State Company for Sugar Industry, he said this is a company producing white sugar from sugar cane, beet and raw sugar as well as added value products such as medical alcohol, molasse, bagasse and fresh yeast. “The expansion of these plants will be a good opportunity for investors,” said Hameed. “There is a possible 15% increase within the existing capability of the plants, but by giving licences for new products, the multinationals will be able to add more than that figure.”

Not all a rosy picture

Ali Saleem Omar, Director General for Construction Industries, said that his sector – which is producing cement, bricks, plastic pipes, glass, ceramics and refractory materials like tiles, aluminium parts and insulating materials – is vital to the future of Iraq.

“The current assessment is that these plants are running at under their design capacity, they are suffering cumulative bottlenecks, and they are not making use of new technologies,” Omar said. “They have suffered three decades of continued instability, but now there are opportunities to use new techniques.

He said that the current vision of the Iraqi government is governed by circumstances, taking all elements into account, and with this in mind there is a period of 10 or 15 years to allow for rehabilitation of the existing plants. The cement production target is set at 30 million tonnes per year, and that for bricks is set at 540 million pieces he said. Currently a large quantity of bricks are being imported.

“Iraq will soon become one of the biggest markets in the region for infrastructure goods, and especially in the construction materials I mentioned,” he said. He added that all the elements were in place for Iraq’s rebuilding efforts to go even higher than they are now. These include demand for housing due to the natural population increase, the replacement and upgrading of existing residential and commercial buildings, and the resolution of the current housing crisis.

Omar said that with current capacity from his three main plants at 6.4 million tonnes, with the possibility of a full electricity supply, the new investors should be able to increase output with a minimum of maintenance. “Given the previous published statistics, there should be no obstacle to raising the production quantities,” he said. According to Iraqi Customs figures, the country is currently importing 5 million tonnes of cement per year.

“The government has ambitious plans, but also we do not want to give a rosy picture about Iraq,” said Omar. “The way ahead is not paved well, so the investment is not free from risks or challenges.” He referred to another recent Iraq investment conference in Kuwait, where the market reaction was quite cautious.

Abdulghani Fakri Al-Jafer, Director General for Textiles Industries, gave a presentation on a sector that is very important for the issue of Iraqi unemployment. His talk also gave rise to a discussion and about awareness of quality control, given that a large part of the production is currently being dumped on the local Iraqi market.

Al-Jafer said that the eight companies in his jurisdiction, including six for textiles, one for leathergoods and one for furniture, interact closely with the private sector that includes 300-plus factories in Baghdad and other governates. They rely strongly on supplies of local Iraqi wool, which is suitable for carpet and blanket production. Cotton is grown in the middle and North of Iraq.

The production in the textiles sector is sufficient to meet only 10% to 20% of the local demand, he said. Al-Jafer said several factors affect the quantity and quality of the available materials, which are going not just into clothing, but into tents, carpets, shoes, bags, furniture and other products.

“The local markets are not being considered as the main source for marketing, since some products are being dumped in the local market,” said Al-Jafer. He said these product lines are increasingly focusing on quality, in areas such as mechanised or hand-made carpets, as well as special products like medical wool, so as to meet the requirements of international markets.

The government recently allocated US$22 million for the rehabilitation of production lines for cotton recently, including one in Kirkuk.

“The sector wants to support also the private industries, with the availability of raw materials such as yarn,” said Al-Jafer. “The sector depends mainly on protection and regulation of the local production, which at the moment cannot compete with similar products, for example from China.”

“We are happy to support conferences such as this one,” said Al-Jafer, “which are being held for the purpose of encouraging investment in many factories. In other aspects they also raise awareness of the training needs, and they give a livelihood to our very able workforce.”

Sufyan Sulaiman Sedeeq, Acting Director General for Industrial Services, presented a profile of the industrial services and project management sector in Iraq. He said this group of state companies are very active, both as advisory companies and companies which implement turnkey projects in the areas of IT control and engineering.

He said that there is a considerable skills base in Iraq, for design and turnkey project management in several engineering sectors (civil, mechanical, electrical and control systems). The state-owned industrial services sector in Iraq includes six companies and some jewels in the crown of the old regime, such as the General Systems Co (GSC), State Company for Design & Consultation (SIDCCO), State Company for Industrial Design & Construction (SEDAC) and State Company for Information Services (ISC).

ISC is a company specialised in programming, which has 120 customers in Iraq. GSC is the only company in Iraq specialised in control systems in electrical power and in oil & gas, and it is one of Iraq’s national companies with huge capabilities.

Sedeeq pointed out that the companies under his control also have expertise in solar power projects and public lighting installations. These include Al Ezz State Company and Al Hather State Company, a firm which used to produce chemical materials and which now produces materials required for the work on Iraq’s power stations and oil refineries.

“The vision is simply huge,” said Sedeeq. “We are looking for international companies to support us with new techniques. We are participating with these companies and they can take a role in the management.”

The Summit revealed that the Iraqi government’s investment budget has risen to US$15 billion for 2008, divided amongst the different state industries, For example, the industrial services sector, with its heavy emphasis on research & development, has a 15% share of this fund, which is being used to prime the interest from the international specialist companies and local contractors who make up Iraq’s industrial competitors as well as its customers.

Energy industry services, key to Iraq’s oil bonanza

Taha Hussein Ali, Acting Director General for Engineering Services, said that there is high demand for all kinds of products in the non-ferrous engineering industry. For steel bars he said that the current demand is for 3 million tonnes per year, and Iraq has an added advantage with its large reserves of scrap steel, estimated at 15 million tonnes including aluminium and copper scrap.

“There are no other companies in Iraq that produce these items, other than companies in the public sector,” said Ali. “Government demand comes from the ministries of oil and electricity. We cannot meet all their requirements for these two sectors,” he said, adding that demand for spare parts and for some advanced technologies is also high.

The companies under this directorate include Al Sumood State Company for Vehicle Industries, a group that used to produce buses, trucks and agricultural equipment. Al Sumood has design capacity for 1,500 buses per year and 2,500 trucks, although its annual output has never reached these levels. Other plants are producing tippers and platforms for the agri-food sector as well as parts, and one diesel engine plant is currently lying idle.

Ur State Company for Engineering Industries is producing cables, metal foil, and it has a rolling mill, a foundry for enamel ware and anodizing plant. State Company for Heavy Engineering Equipment is dedicated to the oil sector with production capacity of 12,000 tonnes per year. State Company for Mechanical Industries is the only Iraqi company producing tractors and irrigation equipment such as pumps. Diala State Company for Electrical Industries produces power and distribution transformers to international specifications, as well as spark plugs and meters. It has divisions producing steam irons, ceiling fans as well as industrial equipment and materials like optical cable (being produced in a new factory) as well as argon gas and oxygen. Other companies within the engineering services sector are producing wire and cathodic copper from the treatment of brass scrap, sponge iron, spiral welded steel pipes and other steel fabrications used in refineries and Iraq’s construction industries.

At times the Iraq Commercial Investment Summit was presented as a wish list, with one industry after another presenting its investment requirements. We should not forget also Iraq’s private sector, which holds many opportunities for partnering, as well as full ownership, not only the public sector companies being discussed at the Summit.

But considering the scramble for funds of similar privatisation movements in the former Soviet Union, Mexico or Eastern Europe, one can see a lot of wisdom in step-by-step approach of the Iraqi government, which bodes well also for its future partners.

For more information on specific companies or manufacturing plants and their production statistics log on to www.industry.gov.iq

The Ministry of Industry and Minerals has also published a guidebook ‘Investing in Iraq’s Industry: State Owned Enterprises’ which is also essential reading on this subject.

 

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