Investors Shun Postwar Iraq as OPEC Star’s Recovery Lags

Ziad Makkawi set up a private equity investment firm last year to capitalize on Iraq’s plans for reviving an economy gutted by wars and sanctions.

Makkawi’s zeal faded as OPEC’s second-largest oil producer struggled, and he now sees brighter prospects elsewhere in the Middle East, including Libya, where deadly attacks persist after the 2011 revolt against Muammar Qaddafi.

“In Iraq, there are suicide bombings, political problems, the Central Bank governor was dismissed, others have been arrested -- these things cast a big shadow on the business environment, and investors shy away,” said Makkawi, the chairman of Dubai-based Blue Gate Capital Partners.

Nine years after U.S.-led forces toppled the dictatorship of Saddam Hussein, even specialists in frontier markets are backing off from Iraq. Daily blackouts, congested ports and other infrastructure woes compound investor concerns about violence and corruption, and a broad recovery continues to elude this energy-rich nation of 33 million people.

Iraq generated $7.8 billion a month from oil sales this year and seeks to triple output of crude by 2020. The economy is set to expand by 14.7 percent in 2013, 12 percent in 2014 and 9.3 percent in 2015, according to an International Monetary Fund forecast. Spreading the wealth beyond the energy industry is proving harder, though.

Political Logjam

“The government has ambitious spending plans, but political disunity, capacity constraints and perceptions of insecurity have meant that very few projects have yet come to fruition,” said Liz Martins, a senior economist at HSBC Holdings Plc (HSBA) in Dubai.

Reconstruction efforts have stalled amid deepening divisions between Iraq’s majority Shiite Muslims and minority Sunni Arabs and Kurds. The Sunni-backed al-Iraqiya coalition boycotted parliamentary and cabinet sessions for several weeks this year, demanding that the Shiite prime minister, Nouri al- Maliki, share power. Political differences have caused delays for seven years in the enactment of an energy law, damping investor interest in oil and natural gas projects.

Friction has intensified between the central government and Iraq’s semi-autonomous Kurds, since the U.S. withdrew its last combat troops in December. The northern Kurds have angered authorities in Baghdad by signing agreements with foreign oil companies such as Exxon Mobil Corp. (XOM) and Total SA (FP), which have criticized terms offered by the national Oil Ministry. Government soldiers clashed for the first time with Kurdish forces on Nov. 16, leaving one person dead.

Adding to the country’s instability, President Jalal Talabani, a respected mediator between rival ethnic, religious and political factions, was hospitalized two days ago after a stroke. Doctors from Germany and Iran are treating him, and a British medical team plans to arrive today.

Attacks Mount

Iraq has endured “a troubled year” of worsening graft, bloodshed and apprehension about the conflict in neighboring Syria, Stuart Bowen, a U.S. special inspector general, said in a report published on Oct. 30. Attacks in Iraq have escalated this year, with 4,019 civilians killed in the first 10 months compared with 3,467 in the same period in 2011, according to the Iraq Body Count website.

“The instability, the problems and the daily struggles never end,” said Ali Hussein, a car-parts dealer in Baghdad. “Leaving the country has become a priority,” the 40-year-old said. “What would a bit more income do for me, if my kids or other members of my family can get kidnapped on any given day?”

Crude Wealth

To be sure, Royal Dutch Shell Plc (RDSA), OAO Lukoil and other energy investors are pressing ahead with projects in much of the country. Iraq holds the world’s fifth-largest crude deposits, according to BP Plc (BP/), and overtook Iran in June as the biggest producer, after Saudi Arabia, in the Organization of Petroleum Exporting Countries.

The nation pumped 3.35 million barrels a day in November, according to data compiled by Bloomberg, and Deputy Prime Minister Hussain al-Shahristani said Oct. 10 that Iraq wants to produce 10 million barrels a day by 2020. Iraqi crude will account for almost half of the increase in global supply this decade, the International Energy Agency said Oct. 9.

“The growth there is boosting our business,” said Richard Davidsen, chief commercial officer of Aqaba Container Terminal in neighboring Jordan. Half of the goods unloaded at his facility on the Red Sea journey by truck to Iraq, and Davidsen wants to capture more of the trade.

Empty Skyline

The government is budgeting $118 billion in spending next year, up 18 percent from 2012. Still, bureaucratic delays and corruption probes have impeded many projects, and Iraqi officials often can’t spend all their budgeted funds, said Sam Wilkin, an analyst in Dubai at Control Risks Group, a consultant.

Transparency International ranks Iraq 169th among 176 countries and territories in its 2012 Corruption Perceptions Index.

Business outside the oil and gas industries has languished. Baghdad’s skyline is almost bare of construction cranes, and security checkpoints and 3 meter- (10 foot-) high blast walls choke traffic. The capital’s only ATMs are located inside banks, where armed guards frisk customers and remove mobile phones.

Tariq Najim, a Baghdad grocer, sees scant evidence of new building even though officials have spent “so much money” since 2003. “How many decades do they need to show us their achievements?” the 28-year-old said.

‘Bit Scary’

One of the country’s biggest projects is a $6 billion planned upgrading of Grand Faw Port in southern Basra province. The government, which has been discussing the work since 2004, awarded a contract to build a first breakwater only last month. Iraqi power plants still can’t produce enough electricity, and the government buys power from Iran and three Turkish generating ships to ease outages lasting several hours a day.

“The last 12 months have been really bad,” said Makkawi of Blue Gate Capital, which opened an office in Libya in November.

“It is a bit scary,” he said. “I mean, a company like Exxon is looking to get out. What does this tell you? There are opportunities elsewhere.”

To contact the reporters on this story: Nayla Razzouk in Dubai at nrazzouk2@bloomberg.net; Dana El Baltaji in Dubai at delbaltaji@bloomberg.net; Andrew J. Barden at barden@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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