Zaab Sethna on Compelling Business Opportunities in Iraq

October 19, 2009

Iraqi Prime Minister Nouri al-Maliki, as many as six other Iraqi government ministers, and U.S Secretary of State Hillary Clinton will be attending the Iraq Investment and Business Conference in Washington DC on Tuesday and Wednesday in a bid to drum up support for private sector U.S investment in Iraq.

Prior to the conference Niqash spoke to Zaab Sethna, a partner at Northern Gulf Partners, a US-run financial advisory services provider seeking to link capital to business opportunities in Iraq, to discuss the prospects for foreign investment in the country.

Niqash: There is a lot of money to be made in Iraq. How great is the interest?

Sethna: There is large interest in Iraq especially in Europe, the Gulf and Asia. Unfortunately U.S investors and companies have been a little slow so far. But hopefully that is changing. The conference should raise the visibility of investment in Iraq and show U.S investors that Iraq could be the most compelling opportunity of our era. The big picture is very attractive: Iraq has valuable water, land, energy, and human resources. It has potentially the largest oil reserves in the world and is the only country that has the potential to triple or even quadruple its current output. I have heard that the Washington conference is fully sold out and can’t accommodate anymore attendees, so I would say that is a good indicator of how great the interest is.

Niqash: Describe the investment climate for foreign businesses. What sort of challenges are there for U.S. investors?

Sethna: Iraqis recognize that they need foreign capital and expertise to achieve their development goals and the Iraqi government has made some admirable steps towards opening the business environment to external investment. The national investment law provides a variety of tax and other incentives for projects in most sectors outside of oil, including a recent adjustment allowing land ownership for residential real estate projects. Also, the security situation is significantly improved over the past two years. Yes, certain guidelines and precautions are still necessary, but we have an office in Baghdad outside the International Zone, and are generally able to do whatever we need to do.

Of course, Iraq remains a challenge for foreign investors including Americans. Iraq was not open to U.S businesses for quite some time. Americans generally know little about Iraq or the region, they don’t speak the language, and there aren’t many U.S firms that have the local business relationships necessary to succeed in Iraq. The banking infrastructure has improved but will need to develop further if it is to serve a large and liquid national economy such as we expect Iraq to become.

There is no lack of opportunity; there are opportunities in nearly every sector. Iraq has a need for everything right now. But most US firms aren’t able to execute on those opportunities because they can’t navigate the complicated Iraq business landscape. Iraq has suffered wars and mismanagement of its resources for decades, and though they are making admirable progress in establishing a new state, it is still an evolving legal, regulatory, and bureaucratic environment. It’s difficult to just jump in and start up.

Niqash: Iraq is preparing for parliamentary elections in January. Is there any apprehension about moving forward with commitments with an uncertain political future?

Sethna: Many investors have an idea of uncertainty and paralysis in the period leading up to the elections but that is not a truly accurate picture. In fact we see that the looming election has actually pushed the Iraqi government to be more proactive in order to show progress to the electorate. One example is the negotiations with major oil companies which have suddenly made significant progress. Another is that Iraq is solving its payment issues with GE and Siemens for the electricity generating equipment that it ordered.

If the question is whether political uncertainty should deter U.S investors I would say no, it is certainly not deterring us. Iraq is going to have growing pains, and the preoccupation with what surprises January has in store could delay many projects. But it will be a speed bump, not a roadblock. If you are looking to make a quick profit in Iraq, the odds are not in your favour, it is still a turbulent place. But Iraqis recognize and appreciate investors who approach Iraq as a long-term opportunity, and investors who are willing to commit to the country's long-term development will be successful.

Niqash: Apart from oil, how and in what sectors can U.S. interests move into Iraq?

Sethna: Well, a number of international firms have committed capital to projects in Iraq, and various sectors are active; for example you have about US $2 billion already invested in telecommunications and nearly US $1 billion in cement. UAE sovereign related entities have recently announced a series of housing initiatives in conjunction with the Iraqi government, and a large contract for a sporting complex in Basra was recently awarded, so of course construction and related industries should experience growth. We see some specific opportunities in financial services. Again, it’s not so much about the sector, but rather how to structure and execute your plans, find the right management team, and local partners. It requires commitment; you really have to focus on Iraq, have a presence on the ground.

Of course for U.S investors who aren’t looking for this kind of exposure there is also the Iraq Stock Exchange, which is small but growing, and has been a real success story. They have made a successful transition over the course of this year to electronic trading and depository. We invest in securities listed on the exchange, and we like the direction they are going.

Niqash: There is a legacy of corruption and nepotism in Iraq. How well will U.S. investors stomach such a climate?

Sethna: Well, first, I think it is mistake to think of this as an Iraqi problem, or even an emerging markets problem, particularly in a post-Madoff world. U.S investors have been able to successfully manage the climate in places like Egypt, China, or Russia, and I don’t see that Iraq should be any different. Corruption shouldn’t obscure Iraq’s other legacies, like vibrant commercialism and a skilled entrepreneurial class, which we find quite palatable.

That being said, yes, the environment is less than transparent, which requires the utmost care and diligence. We maintain strict zero-tolerance policies toward any form of illegal behaviour and take pains to ensure that we comply with all relevant regulations in this respect. To their credit, Iraqi officials recognize that they need to improve transparency in order to attractive foreign capital, and there have been a few high profile investigations regarding official corruption.