Global Economics

Iraq Rebuilds, Germany Cashes In


Relative stability and plenty of money—but a lack of expertise—are paving the way for lucrative contracts

Now that the security situation in Iraq has improved somewhat, the government there is pushing ahead with plans to rebuild the war-torn country. Plenty of money — but a lack of expertise — is paving the way for lucrative contracts, particularly for German firms.

At nine o'clock in the morning, things are already starting to bustle at the Rashid Hotel on the edge of the Green Zone. In the lobby, Iraqi parliamentarians, Western businessmen and special envoys from the Gulf states are busy trying to land business deals.

"A year ago you could have run a bowling alley here and no one would have bothered you all day long," says United States Ambassador Charles Ries, coordinator for economic transition in Iraq, "but now the budgets of the ministries are overflowing." Of the $25 billion (€16 Billion) in funds earmarked for reconstruction in 2008, Ries estimates that the country will barely be able to spend $9 billion.

With state coffers brimming with that kind of cash, Iraqi Prime Minister Nouri al-Maliki has decided to head for Berlin this week. He aims to convince foreign companies — and particularly German firms — to join the reconstruction effort. And his overtures toward German industry are "more than just a courtesy in the run-up to a state visit," says German-Iraqi surgeon and Hanover resident Hassan al-Haddad from Hanover. Maliki recently involved Haddad in a plan to build 10 hospitals back in Iraq, each with 400 beds. The prime minister has called on Haddad to "find a German company that can really tackle this project." Maliki and his team are working intensively to nurture the delicate upswing that is taking place in Iraq — now that a measure of stability and security has returned to the country.

Iraq simply does not have the resources to rebuild on its own, and this has prompted the government to woo foreign companies and investors along with engineers, petroleum industry experts and doctors, like Haddad. Slowly but surely, European and American companies are beginning to trust the incipient peace, although it is often shattered by bombings, like the one last Tuesday that left 33 people dead near Baghdad.

Such attacks are a poignant reminder that the country is still teetering on the brink of disaster and that stability and security remain relative terms in Iraq. Nevertheless, there have been tangible changes for the better. Iraqis are drawing hope primarily from the economic boom that has spread across the country.

Iraq will take in over $100 billion this year from oil exports. Well-meaning statesmen who continue to offer financial aid are now met with blank stares. "Money is the last thing that this country needs," remarks one European diplomat in Baghdad. A far more pressing problem is: Where to spend it — and where do we start?

Iraq needs virtually everything, a reliable power grid, new highways, modernized oil-drilling facilities, bridges, machines and trucks. A large part of the country's industry has been brought to its knees. "We have to start over in many areas," says Maliki.

It comes as little surprise that international corporations are taking a good look around to see what they can do, where they can make money and what kind of risks are involved. And the Germans — who still enjoy a good reputation in Iraq — are being actively recruited.

Lutz Stache is the CEO and owner of AHG Industry, a building materials company based in Cottbus, Germany with 3,500 employees on its payroll worldwide. He recalls a "slightly strange" call that he received back in 2006. On the other end of the line was an Iraqi who lives in Germany and who made a proposal: "Let's talk about my home country."

Stache was skeptical at first, but a few weeks later he found himself traveling to Iraq and speaking with Kurdish ministers. They told him that they came across his name because he had refurbished dilapidated old cement plants and factories for manufacturing building materials in Romania and China. The Iraqis told him that they had similar industrial ruins in their country as well.

An Economic Environment Reminiscent of East Germany

Two months ago, Stache was awarded a contract for a cement plant near Kirkuk — with an Iraqi Arab and a Kurd as partners, who together have a 49-percent stake in the venture. The two of them take care of the administrative details and the contacts to government agencies, while Stache manages the company — and business is booming. Cement is more expensive in Iraq than in Germany. A ton currently costs about €100. This means that the plant brings in €5 million every month, with labor costs of less than €1 million, making it a highly lucrative business.

Stache has retained all 1,200 Iraqi workers, and he intends to keep his entire staff, although he could "easily" get by with half that workforce. "We're retraining people," says Stache, "but we're not firing anyone. That could disturb the working climate at the plant." Many things about this business environment remind him of the former East Germany, just before the fall of the Berlin Wall. And he believes this is one of the reasons why the Germans do so well in Iraq.

Before the war, Iraqi industry was almost completely state-owned. A large part of the workforce was employed in the public sector and unemployment was low — although most workers had practically nothing to do. The system was ineffective, but relatively stable. Oil money flowed into the country.

Today, the infrastructure is roughly in the same condition as in the former East Germany after 40 years of socialism. At the same time, there is a sense — at least among businessmen — of a new era about to dawn, reminiscent of the mood in Germany in 1990. There is a restless feeling of energy and euphoria in the air. "Those who miss the boat now will have a hard time getting a footing in this country in the future," Stache says.

Without a doubt, "people today can already make a great deal of money, and in the future they'll be able to earn even more," says Ries, the economic coordinator at the US Embassy. Nonetheless, he warns that the security situation "still remains a challenge." He adds that companies should prepare themselves for an antiquated bureaucracy and a bottomless pit of corruption: "Virtually no self-respecting civil servant working in a ministry would dare to sign a contract with a foreigner."

Those who sign also take bribes — and it will be years before this old way of doing business changes. Nevertheless, there are fairly good chances for a sustainable economic upswing. The reason is simple: oil.

Iraq currently produces some 2.5 million barrels a day, yet during the years marked by sanctions and war, the oil industry was criminally neglected. More efficient facilities alone would make it possible to boost daily output to between 3.5 and 4 million barrels, German government officials in Berlin estimate. In addition, oil exploration has been placed on hold over the past five years — and the country is "under-explored." The staff at the Economics Ministry in Berlin estimates that production could be raised to 10 million barrels a day. That would be more than what Saudi Arabia currently pumps.

The country lacks the required expertise, however. This means that German mechanical engineers, facility builders and pipeline construction companies have excellent prospects for landing lucrative contracts. "Iraq has a huge untapped potential in oil and gas reserves. Maliki's government is prepared to involve first and foremost German companies in planned investments that are worth billions," says German Economics Minister Michael Glos, who recently paid a visit to Baghdad.

The Iraqis are very forthright, says Glos. "They are tired of traveling to Dubai or Amman to negotiate ventures in their country. They expect interested parties to come to Iraq to discuss possible projects." He says his short trip was intended to encourage German entrepreneurs: "We have a satisfactory security situation, particularly in the Kurdish region of Iraq. This presents a starting point for business activities."

Now larger corporations are interested in getting in on the action in Iraq. German commercial vehicle manufacturer MAN has had a sales outlet in Baghdad for some time. Daimler AG is considering taking over a truck factory in the industrial city of Iskandariyah, in a region that up until recently was dubbed the " triangle of death (more...)." German companies could also win the contract to rebuild the airport in Basra.

New investment laws allow foreign investors to import machines and production facilities duty-free, and all taxes on their profits in Iraq are waived for 10 years. "Nobody can complain about conditions like that," says Stache. The entrepreneur has already applied to build a second cement plant.

He has already boosted production at his Kirkuk plant from 800 to 1,500 tons a day. Over the coming weeks, he intends to invest €20 million — a move which he expects will quadruple his sales. However, this location is facing a political problem which could prove highly explosive.

Kirkuk is rich, but there is a great deal of controversy as to which province the city belongs to. The Kurds would like to declare it as their own property by referendum. The Turkmen and the Arabs, who Saddam Hussein settled here over the decades to break the predominance of the Kurds, want to postpone the referendum — and, if possible, block it altogether. A decision on the matter is expected by October.

Kirkuk is swimming, like the entire county, on a sea of oil. Businessmen like Stache would like to invest — assuming the climate remains at least as stable and calm as it currently is in Iraq.


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