Iraq Secures €262.16 Million Loan to Launch Pivot Irrigation Project

Bridging the Gap - Opportunities for Swedish Businesses in Iraq's Growing Market

Iraq has moved from one of the least investor-friendly and highest risk countries in the region to a middle-risk country. The country is about to rebuild, and its people have high expectations and an increased purchasing power. 

Swedish companies must bridge the gap between Iraq's high growth potential and its low-income-earning status by adjusting their strategies and long-term outlook to be rewarded in due time. 

The time to establish local presence is now, as personal relations are fundamental to successful investments. The key is to build sustainability-oriented value partnerships at national and local levels.

Iraq is a low-risk country with high entry barriers. Swedish companies must act now to take advantage of the largely untapped business opportunities in numerous sectors including infrastructure, construction, and environment.

Background of Iraq's Market Growth

After 2003, Iraq has been marked by extraordinary opportunities in sectors such as construction, telecoms, media and technology, manufacturing, retail, consumer goods, commodities, insurance and banking, engineering, commerce, education, and other vital services. 

Foreign direct investment in the oil sector and broader opportunities implicated by Iraq's six-year oil sector restructuring program have had mixed results, to say the least. However, foreign companies have sought to take advantage of Iraq's energy sector as a prelude to increasing their involvement in other sectors. 

As Iraq's parliament passes new laws allowing for wider FDIs in other sectors and the growing oil stream fills the banks of the 24 million Iraqis of this land, recovery and growth in the other parts of the local economy follow.

Before being torn asunder, first by war and sanctions, and next by war and insurgency, Iraq's economy was once one of the more diversified in the Middle East. Not only was oil a key Iraqi strategic resource, but other sectors were also emerging before the government turned its focus to war or imposed ruinous restrictions on them.

The construction industry, well-served by indigenous concrete, steel, and skilled labor, was picking away at some of Iraq's infrastructure bottlenecks. For a time, only Jordan could claim to be Iraq's main source of building materials.

Iraq's sizable middle class displayed an appetite for white cars, white goods, and prescription medicines that distinguished itself from the tastes of several other nations in the region without oil income far in excess of their population's needs.

The energy, determination, and ambition of Iraqis eagerly participating in the process of nation-building, as well as the resiliency displayed by Iraq's private sector's resistance to insurmountable odds, and its rebounding activity in the face of the current extraordinary opportunities, are not unique to the development of Iraq.

Purpose of this Review

Sweden is one of Iraq's main trading partners in continental Europe. There are Swedish Foreign Consultative Services Officers (FU) in Baghdad who have been mandated to increase the level of relations between Sweden and Iraq, including business to business contacts. 

What is less well-known is the Interests Intersection Group of Sweden (IHSG) which is active in southern Iraq. Stockholm has decided to increase the size of its FU from three to seven employees who are now distributed out over three cities, namely the capital Baghdad, and Basra and Erbil.

The Swedish Government has declared that they view the south of Iraq as having a potential high degree of opportunities that are economical for Swedish-connected businesses, particularly in sectors such as infrastructure and medical science. The analysis presented in this paper should however be treated cautiously as it is based solidly on a library study.

This article is an analysis of business opportunities in the south of Iraq within 10 different sectors. The aim of the study is to bridge some of the gaps that have emerged over the years, but that has become glaringly obvious at present.

This analysis is particularly timely for the Swedish FUs and the IHSG in Iraq and specifically for businesses and companies that are interested in doing business with Iraq but that do not know how and what sectors to target. While northern Iraq has received a significant portion of these investors, much less attention has been paid to the untapped potential of southern Iraq.

Understanding Iraq's Market

The infrastructure has been heavily depleted. The Iraqi’s government has little resources it can deploy to improve the lot of its citizens. Even with the anticipated and real development of international fast food brand names at a plethora of fast-food restaurants, where families can eat in relative safety, the consumer market can be almost entirely characterized as one that is built around the basic and essential human requirements of 'decent' personal and communal security, education, and health.

To understand Iraq's market, one must understand the country's recent history. Despite being home to one of the oldest and most influential cultures in the world, having a young and fast-growing population, and possessing some of the world's largest and most diverse natural resources, Iraq is a market disrupted by decades of war, international sanctions, and more than three years of fear and repression.

Despite these challenges, Iraq is most definitely not a failed state. It is a very different entity and understanding the current and real Iraq is vital if the country is to move forward. In 2018, Iraq moved up 6 places from the previous year's Doing Business Index. This movement is driven by a number of reforms, initiatives, and an increase in fair competition to attract investors' interests.

Economic Landscape of Iraq

A government subsidy system, a resource-based economy, and protectionist business laws hamper business development.  The Iraqi government sustains a heavy subsidy system; in 2010; 18% of its GDP in oil reserves was distributed through liquid fuel measures and the Public Distribution System, in addition to free food, housing, unemployment insurance, and "no-questions-asked" public works programs.  The subsidy system encourages talented students to obtain a university degree.

Since 2003, Iraq has experienced six consecutive years of economic growth, but still faces many constraints that make it a challenging business environment. Iraqi infrastructure was damaged during the 1970s and 1980s, years of western economic sanctions, and leadership restructuring during the post-2003 years affected business decisions, labor markets, and considerations of land use.

While the reasons are multifold, one of the biggest constraints is the lack of security and safety for daily life.  Additionally, Iraq's business environment is inhibited by a lack of transparency and formal rules, a well-educated, employed, and productive labor force, transport and communication, and the quality of its utility’s availability such as electricity and water.

Key Industries and Sectors

The Development category includes:

1. Housing,
2. Infrastructure,
3. Telecommunication,
4. Basic Industry,
5. Power Generation and Distribution,
6. Transportation, and
7. Agriculture.

These sectors ensure broad development in Iraq, ensuring long-term investments in a wide set of areas.

The Stabilization category includes Energy, Water and Wastewater, Oil and Chemical Spill Management, and Healthcare. These industries are highly relevant to Iraq due to human needs and environmental concerns. In consequence, these sectors have utilized international investments to a greater extent than some other areas.

With years of underinvestment, the development needs in Iraq are broad and expansive. The goal towards stabilization and normality involves every sector of society. From a business perspective, we identify 10 sectors in two categories:

• Stabilization, and
• Development. 

This eases the understanding of how different industry sectors link to the necessary development of a country in turmoil. An acquisition in the latter categories would not only provide a return on investment but make an enormous impact for literally every Iraqi citizen.

Challenges and Opportunities for Swedish Businesses

Both Swedish and Iraqi firms have identified many opportunities in the key economic sectors, which are construction and construction materials, energy, ICT, education, training, and healthcare sectors. 

In addition, there are potential markets in Sweden for products such as dates, salt, and other agricultural products specific to Iraq, such as Samoon, a type of bread which is exported to Sweden by the Iraqi community.

Iraq also offers an attractive platform for businesses wanting to re-export to regional markets in the Middle East. Five focus areas for commercial development which demand a closer look include the opportunity for manufacturing and skills transfer, the demand to fill a number of gaps in the Iraqi labour market (especially demand from abroad for ICT skills), the potential for energy projects in Iraq's electricity, gas and renewable systems, and, in general, focus on the wider Eurasian trading bloc.

There is interest among Swedish companies to explore emerging opportunities in Iraq, but in many areas of the country, caution is advised. On the business front, companies report security concerns and compliance challenges with local anti-corruption laws.

The trade barriers on the Iraqi side that demand a closer look include issues affecting market access, such as:

• Customs regulations,
• Technical Standards, and
• Documentation Requirements. 

A firm-level case study on Swedish business in Iraq shows that driving forces for establishing Iraqi operations differ from those associated with economic and security-related opportunities in stable areas, but that the experiences of doing business are quite similar within the same firm across different regions.

Having operations in high-risk areas endows the firm with a unique set of local developer qualities, including the ability to attract and retain the necessary manpower through offer of job security, economic benefits through premium salaries, and internal career opportunities tied to foreign assignments.

These regional features show key firm-specific competencies of strategic importance over the longer term and point at the nexus between international business and war, peace, and security in times of war.

These findings, set against a backdrop of nationalist domestic lobbying against PECD initiatives, have led to concerns that lax monitoring and enforcement may potentially turn the PECD-reporting standards into a mere part of the UN conventions.

Consequently, while these business actions and reactions may represent a trade-off solution in a conflict-ridden environment, they might generate the moral hazard of indirectly sustaining the repression the UN Convention process seeks to address, by validating low political risk and corporate rewards in high-risk environments.

This also represents a risk of low legitimacy in the PECD process, which can be a political risk when seeking to legitimize the PECD amongst NGOs, labor unions, and the public, and, if it leads to non-compliance, presents a further risk to the PECD systems through potential arbitration and/or dispute settlement cases.

Cultural and Social Factors

Swedish companies should work on building a long-term relationship with Iraq since factors such as loyalty, integrity, commitment, sustainability, and continuous relationship with Iraq as a market can provide valuable trust beyond short-term profits as discussed in next topic.

It can be seen as less risky for an Iraqi to collaborate with a company from a neutral state such as Sweden. However, it is not easy to build trust. While Sweden is probably at the top in the field of long-term relationship-building, when it comes to Europe, there is perhaps one significant aspect that Sweden has in common with other North-Western countries, and that is that a division of labor has emerged as a consequence of higher technology.

The innovation, competence, and technology that have formed the base for export growth made by the Swedish companies are the same assets that the Iraqis are seeking in relationship building with the new Iraqi private sector.

Iraq is like any other Arab culture in that it is built on relationships. Arab people need time to get to know you and who you are. The system of running a privately-owned business within the North-Atlantic culture is known to the Iraqis, and they have high expectations that it suits them, even if it is not in line with their society.

However, basking in historical experiences and lessons learned from Sweden, Iraqis often consider Sweden as a precursor of where they hope Iraq is heading. Sweden is increasingly perceived as a symbol of national identity and pride for Iraqis.

Strategies for Market Entry

Some macroeconomic results for the emerging peace-building stage in Iraq mean for Sweden. It should be directly in the commercial interests of Swedish business, just as in the more general interests of the Swedish State and Society, to have a co-opening Iraq, cooperating in the development of a wide variety of goods and services, consuming goods and services that are the products and mark the sign of a well-functioning and well-satisfied Commonwealth society.

It can and should mean new export orders for Swedish exporters and a better future. Products to help Iraq build that are themselves a realizable potential service which ought not to be significantly delayed.

One size does not fit all, and different companies will have different-looking risk assessment profiles than others when seeking commercial advantage in Iraq. This thesis points the way to enter into the much-debated strategic and business relationship with Iraq and explains, as far as possible, what has already been achieved and what can be achieved in the future with and by the Iraqi stakeholders.

By following these guidelines, it is possible to transform the mission of doing business in Iraq into a new and rewarding experience.

Each company that wants to do business in Iraq has to analyze its own risk balance. This depends on the nature of the business and the size and scope of the potential deal. A first principal strategy for companies is to work to their own strengths, that is, to concentrate first on businesses they know and understand (that is a relatively long-term commitment with the company involved), to examine their potential Iraqi customers and their possible critical failure points, and to engage according to their own confidence level in the risk/reward balance involved.

Direct Investment vs. Partnerships

A common concern is that a chosen Iraqi partner might abandon the collaboration, leaving the foreign company exposed.

However, there's no evidence of this happening specifically in post-war Iraq. This fear shouldn't be a bigger deterrent than partnership risks faced in other countries.

Many Iraqi companies emphasize the value of partnerships. Local firms, especially those that have thrived during difficult times, can offer strong project management skills and connections to secure new projects. Remember, building relationships is key. (Consider Swedish involvement in the Tijara Group's new investment programs, valued at nearly $300 million).

Partnering with Iraqi companies is the most effective way for Swedish businesses to enter or expand their presence in Iraq. While some may prefer a solo approach due to concerns about technology protection or staffing in risky areas, the advantages of local partnerships outweigh these challenges.

Legal and Regulatory Framework

The Investment Law No. 13 of 2006 offers a variety of incentives for both foreign and Iraqi investors. The law is also introduced to provide guarantees not to nationalize investment projects and to provide special facilities to projects which have special importance to the economy of Iraq.

Up to 100% foreign ownership is allowed, with the possibility to acquire real estate in the main areas of investment as part and parcel of the project, up to 40% of the job opportunities available for non-Iraqi workers, customs exemptions, and exemption of processed primary materials from fees and taxes.

The investor is subject to the Central Bank Law regarding the transfer of profits, the capital invested, compensation in the event of expropriation, and participation in the arbitration proceedings in the case of dispute.

The legal system in Iraq is based on British law, Ottoman law, and French law. New laws have been implemented by the current government, but implementation is a major challenge.

There is little control of legislation passed by the government and parliament. Many laws are based on Interim National Administration (Iraqi law under American and international guidance) that went into force in 2003.

There is a tendency to protect national production of goods and services by keeping costs of importation high. Efficient and functioning customs procedures are crucial to combat customs fraud and boost governmental income from taxes.

Even with the improvements made, tax rates are very low and the proportion of taxpayers in the country is very small and insufficient to build a healthy tax system. One of the reasons for this; poor training of officials. An efficient tax system is a cornerstone in a democratic society and is important for the trust between the government and the citizens.

Successful Swedish Businesses in Iraq

Previous generations of Iraqis have fond memories of Volvo's old buses and trucks. A young Iraqi with an engineering degree who I knew was working in Stockholm as a member of a committee active on some Swedish projects in Iraq.

As we were discussing Iraqi-Swedish relations, he surprised me for a moment with the question, "Why are the Volvo buses better than others?" He continued to explain, "Iraqis are also operating other brands buses, but the preference in the city center has always been for the Volvo in particular." It's a very good question considering that if it were not during the conflict of Iraq, significant investment would have been made in the transportation system. It should restart in the period following the clearance of security-related restraints, and Swedish companies could benefit from their past investments.

• Telia Sonera, the Swedish telecommunications firm, has been active in Iraq for several years and now provides communication services via both the landline and mobile network.
• PM Europe is a large contractor with operations in several countries, including Iraq.
• Atlas Copco has been active in Iraq for a long time. The company is building the Samawa Power Plant in the Muthana Governorate. The project is worth an estimated SEK 450 million.
• Trelleborg is also active in Iraq, carrying out a number of road construction projects.