I was at the Invest in Iraq conference yesterday, being heralded by Lord Mandelson as a “new chapter” in Iraq’s history. I wondered if the timing was planned – the UK unveils a big conference to attract private investment into Iraq, the same day it pulls its troops out of Basra…out with the troops, in with the bankers! – but maybe that’s cynical.
It was an impressive event – the main hall at the Landmark Hotel, which seats around 500, was completely full, with people being turned away. Prime minister Al-Maliki and several other ministers gave a strong message: Iraq is moving from a centrally-planned to a free market economy, and it wants to move very quickly to provide jobs and services to the economy. ‘Otherwise’, as the suave deputy PM Barham Saleh put it, ‘we will be voted out at the next election.’
One of the key talking points was the negotiations now going on between the government and around 30 foreign oil companies, for the rights to develop Iraq’s enormous oil reserves. This will be the first major post-war private investment into the country, and the deal that really kicks off the country’s post-war reconstruction.
Apparently the negotiations are going well, though I heard mixed reports about what the government is demanding – some said a 51% stake in projects, others a 75% stake, others that they may allow foreign companies to take a controlling stake in projects, which would be fairly unheard of in most emerging markets, but the government needs money to stay in power, the price of oil is low, so it’s not in as strong a bargaining position as say the Kremlin was in 2007, when it ‘re-negotiated’ several 90s era deals.
Hopefully the Iraqi government will build some flexibility into deals, so that it will get a greater share of profits if and when the oil price rises.
The other question was the reconstruction of the electricity sector. Apparently, it’s now back to pre-war output levels, which means the country receives on average 14 hours of electricity a day. Improving this will be key to the government and economy’s success.
It’s a daunting task. One businessman I spoke to, who’s advising on the sector’s reconstruction, said output needed to be quintupled to cope with the rising energy demands of Iraqis. Western private investment could be persuaded into that sector, according to some bankers I spoke to, but it would need western government support, because unlike the oil sector, electricity revenues cannot be secured offshore, so there’s all the local legal risk for big electricity investments.
That support could come in the form of export credit agency (ECA) guarantees. Such ECA guarantees are quite normal for big infrastructure projects in emerging markets, and in today’s low liquidity market, it’s essential if public-private deals are going to get done. Otherwise, governments have to finance deals off their own balance sheet, which Iraq’s government cannot yet afford to do. So ECA coverage would seem to be essential for the reconstruction of Iraq’s infrastructure.
But here’s the rub – not a single western government provides any export credit agency coverage (ECA) for project finance in Iraq. Not the US, not the UK, nothing.
Many bankers I spoke to said they are willing to put alot more money into the reconstruction of infrastructure, but they would need ECA coverage to do so.
I was really shocked to hear we don’t provide any ECA coverage for the country. All that talk of nation-building, and according to Hugh Sykes of the Today show, all Basra has to show for it is a UK army-constructed fish market.
There’s a strong economic motive for providing ECA coverage for private firms to help re-build Iraq. And, I would argue, there is also a moral argument for it.
At the moment, however, Iraq is apparently ‘too risky’ for ECA coverage. But if western governments are not prepared to risk their money in Iraq, how ever are they meant to persuade private companies to do so?
