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U.S. companies put little capital into Iraq

Postwar Iraq was supposed to be a bonanza for American companies. The administration characterized the more than $21 billion Congress allocated to the reconstruction as a down payment, an initial investment that would spark the economy and bring riches to the Iraqi people as well as American entrepreneurs. The reality a year after President Bush declared the end of major combat is far different.
Iraq Economy struggle
Workers from Ishtar, a shop for electric goods in Baghdad, wait for customers on al Karrada Street in March.Sylwia Kapuscinski / Abaca file
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true">The Washington Post</a

Commerce is thriving on Saddoun Street again, and its storefronts have the feel of a global bazaar. Glossy billboards show off electronics from South Korea. Vendors hawk cell phone service from Egypt. Corner groceries stock ice cream from the United Arab Emirates.

Conspicuously absent: U.S. brands.

Postwar Iraq was supposed to be a bonanza for American companies. The Commerce Department hosted a series of conferences attended by thousands who dreamed of investment opportunities promised by a free Iraq. The administration characterized the more than $21 billion Congress allocated to the reconstruction as a down payment, an initial investment that would spark the economy and bring riches to the Iraqi people as well as American entrepreneurs.

The reality a year after President Bush declared the end of major combat is far different.

Though many dozens of U.S. corporations have government contracts to help rebuild the country, relatively few American companies have invested their own capital. The volatile security situation has kept many potential investors away, and even as the U.S.-led coalition government has called on businesses to come to Iraq, the State Department has warned Americans to stay out of the country.

The beheading of Pennsylvania businessman Nicholas Berg, broadcast this week in a video on the Web, put a face on the dangers facing private entrepreneurs trying to operate independently in Iraq. Berg's family said he was inspired to go to Iraq after attending a government-sponsored trade fair for potential investors. But when he arrived in Iraq and met with State Department officials, they begged him to go home and even offered him a plane ride.

Commerce Department officials say they still encourage investment in Iraq and believe the country is hospitable to U.S. businesses. William H. Lash III, assistant secretary of commerce and chairman of the department's Iraq Investment and Reconstruction Task Force, said that when he was last in Iraq, in February, he "was out and about without a [flak] vest walking around the markets with an American flag." He said this week that it's difficult to assess whether he would still do that if he went back today but that companies should look at investing in Iraq "not only an economic opportunity but a moral imperative."

But, Lash cautioned, "if you're going to do large-scale investment in Iraq, if you are going to engage in reconstruction, we have to say it's prudent to have your own security consultant."

'It's not a safe time'
U.S. companies that have dared to start operations in Iraq, mostly small ones, say they have had to grapple with hijacking of supplies and mortar and rocket attacks on buildings where employees reside. Given the growing hostility toward the occupation, it has been difficult for them to advertise their presence and take full advantage of the burgeoning market.

PepsiCo Inc., which committed $100 million to buy back about a 30 percent stake in Baghdad Soft Drinks Co., its old bottling plant, remains the only U.S. company to make a large capital investment.

General Electric Co. had sent a team of business development managers into Iraq to research opportunities for its medical supplies division, but began pulling people out last month due to concerns about the violence. Procter & Gamble Co. made a joint-venture deal with an Iraqi company, but is holding back marketing and distributing its products because of the unrest.

Haworth Inc., a large office equipment company based in Holland, Mich., has entered into a joint venture that hopes to provide technology to Iraqi government and commercial offices. But the company said Thursday that the recent violence has forced it to pull back from sending more staff to the Middle East.

"Right now it's not a safe time," Haworth spokeswoman Nicole Tallman said.

Daoud L. Khairallah, an attorney with White & Case LLP in the District, said Berg's murder has made his already hesitant corporate clients even more cautious about entering the Iraqi market. "If a client would ask me 'Should I go to Iraq now?' I would not feel comfortable telling them yes," Khairallah said.

Another factor in American companies' hesitation to invest is the chaos of the Iraqi government and its laws.

"The physical risk simply inhibits people from getting around and doing anything, but the political risk is really what's holding people back," said John DeBlasio, a U.S. Army major who until recently was an adviser to the Iraqi Ministry of Trade as part of the U.S.-led Coalition Provisional Authority.

Simon Haselock, head of the CPA's media development, said that while he has been contacted by practically every major entertainment, music and broadcast conglomerate about their interest in investing in Iraq, many are holding back because the laws and regulations are still in flux.

"Something that is completely unregulated is not necessarily a good thing," he said.

The result is that Arab, Asian and European firms with more experience working in the region -- and more stomach for dealing with the uncertainties -- have taken the lead in the country's emerging markets. Only one of the 15 banks that applied for licenses was American, for instance, and only a handful of the 100 companies that applied for cell phone licenses were American.

A weak commercial code under Saddam
Foreign investment in Iraq during the Baath Party's nearly three-decade reign was almost nonexistent. Practically everything was owned by the state and, by statute, only companies or individuals from Arab nations were allowed to have significant ownership rights.

U.N. sanctions imposed after the Persian Gulf War in 1991 brought the private sector to near collapse. Even simple things such as vegetable oil became hard to come by. Wages were so low that each Iraqi family depended on a monthly government-supplied food basket.

W. Tompie Hall, chief executive of Global Market Link Inc., a Colleyville, Tex.-based consulting firm helping businesses break into the Iraqi market, said the business laws of the largely socialist state must be overhauled to make it hospitable for capitalism.

"Iraq had a very weak commercial code under Saddam Hussein -- no binding arbitration, no compensation for overtime, inability for foreign companies to have majority ownership," Hall said. That makes private businesses nervous.

Officials from the occupation imagined that they would create a new Iraq where the private sector would drive the economy. Iraq's stock market, where traders once scribbled numbers on blackboards, would become a modern, computerized multiplier of investments. Hussein's formerly state-owned companies, many of them extremely lucrative, would be open to privatization. And a new banking system would provide capital.

But the insurgency and disputes between the CPA and the Iraqi Governing Council have delayed many initiatives. The stock market has yet to open. Plans to privatize the state-run companies had to be delayed. The banking system has yet to gain momentum with businesses or consumers. And a major trade fair for private businesses scheduled for April was postponed indefinitely.

Most foreign investment has been relatively small, in setting up distribution networks, hiring Iraqi partners, and leasing offices and other infrastructure.

Direct foreign investment, besides Pepsi's, has been limited to the companies that snagged the banking and cell phone licenses, DeBlasio said. The three winners of banking licenses -- Britain's HSBC Holdings PLC and Standard Chartered PLC and the National Bank of Kuwait -- have been preparing to open branches all over the country.

The three winners of the cell phone licenses -- Egypt's Orascom Telecom Holding S.A.E. in central Iraq, Kuwait's AtheerTel in northern Iraq and Asia Cell, a partnership between companies from Kuwait and Bahrain, in southern Iraq -- paid the interim government $9 million to fund a regulatory agency.

Meanwhile, other projects remain in the planning stages.

Theoretical joint ventures
Sallyport Global Holdings, a Boston consulting firm, is teaming up with the Iraqi American Chamber of Commerce and Industry and Baltimore-based Target Logistics Inc. to build a 25-acre business park in Baghdad and is negotiating a lease for the land, according to Sallyport partner Thomas W. Charron.

In recent months several American and Middle Eastern companies have announced their intention to form joint ventures that would invest "billions" in Iraq. That money is still only theoretical.

James Sosnicky, an economics officer for the Iraq Development Center for the U.S. Embassy in Amman, Jordan, said that while the business community is shaken by Berg's killing, the security situation is not as dire as the incident might suggest. He advises Americans to start operations in the many parts of the country that are stable, seeking out Iraqi partners -- and private security.

"If you ask most Americans, they think of the whole Middle East as one wall of fire, but in many parts of Iraq things are normal -- people go to work and go shopping. That gets lost when seen through the eyes of a television lens thousands of miles away," Sosnicky said.

Richard T. McCormack, former undersecretary for economics at the State Department, said he would not fault the U.S. government for its cheerleading for investment in Iraq because the dangers are obvious. "All you have to do is open up the newspaper to see the risk involved. All you have to do is try to get life insurance and see the premiums," McCormack said.

One of the top priorities of the occupation authority before the June 30 handover of limited authority to the Iraqi government is laying the foundation for a legal and regulatory system designed to spur more private investment.

In the past few months, the CPA announced that it would permit 100 percent foreign ownership and management of businesses in Iraq, except for oil and other natural resources. It also introduced a personal and corporate income tax limit of 15 percent, clarified customs duties for importing and exporting goods, and created a Federal Communications Commission-like entity that will regulate telecommunications and media.

Dan Sudnick, until recently the CPA's senior advisor for media and telecommunications, said his team and others have been working with Iraqi leaders to craft a legal system that will ensure that businesses can grow freely while having their rights protected. He believes the new Iraqi regulatory body will encourage investment in TV broadcasting, long-distance telephone service and Internet service. He sees Iraq's main highway from Kuwait to Baghdad growing into something like the 101 of Silicon Valley or the Dulles toll road of the Washington area.

Important unknowns
Among the most important unknowns about the emerging Iraqi economy is what will happen with its untapped oil wealth. Iraq has the second-largest proven reserves after Saudi Arabia, but its production was limited under the old regime by old equipment and lack of funds to explore new fields.

Halliburton Co. subsidiary KBR Inc. and Parsons Corp. won large government contracts to rebuild oil fields, but a year after Saddam Hussein fell, there has been no new investment in Iraq by the multinational oil companies.

Mohammed Aboush, a director general for the Oil Ministry, said that he has been approached by representatives for all the giant oil companies around the world but that most are not ready to commit to any projects.

"A lot of them are biding their time given the security issues and political climate. Who is going to run the show? If you sign with X, who is to say X will be in charge when the Americans leave?" Aboush said.

Isam Abbas, the Baghdad agent for a major U.S. oil company that he asked not be named for competitive reasons, agreed: "There's too much uncertainty to make any investments yet."

Many U.S. companies have stationed teams in places just outside Iraq, including Amman, Kuwait City and Dubai, United Arab Emirates, in preparation for when the country stabilizes and they will be able to pounce on the market.

Ed Rogers, partner in New Bridge Strategies LLC, a Houston consulting firm formed last year to help businesses in Iraq, agrees much of the investment money entering Iraq now is from other Middle Eastern countries.

"There's a lot of people there," Rogers said. "But you don't have Toys R Us. McDonald's is not opening any time soon."

Spinner reported from Washington.