New Iraq Not Tempting to Corporations

When U.S. forces rumbled into Baghdad last year, there were widespread predictions that big U.S. companies would be close behind, pouring billions into investments that would yield a bonanza for American brands and give a vital boost to the Iraqi economy.

Fifteen months later, however, corporate America’s stampede has yet to occur. U.S. officials, businesspeople and experts know of no leading U.S. firm that has made a large-scale capital investment in Iraq.

“I don’t believe the board of a multinational company could approve a major investment in this environment,” said Keith Crane, a senior economist at the Rand Corp. who worked for the U.S.-led Coalition Provisional Authority in Iraq last year. “If people are shooting at each other, it’s just difficult to do business.”

President Bush has made Iraq’s economic health a chief selling point for the continuing U.S. mission there. “Iraq’s economy is moving forward, markets are beginning to thrive, new businesses are opening, a stable new currency is in place,” Bush said before troops in Florida on June 16.

U.S. reconstruction work and Iraqi oil sales are pouring cash into the country. But Iraq remains a country where one can’t use a credit card or an automated teller machine. It’s also expensive and difficult to arrange the multiple Internet connections on which most modern businesses depend. The security risks are astronomical -- scores of foreign civilian contractors have been killed in the wave of violence that has seized Iraq in recent months.

The commercial sector also continues to be stunted by spotty public services such as electricity, the lasting effects of a centralized economy and uncertain business laws. Bank lending is limited and insurance costly, if available at all, businesspeople say.

As a result, although dozens of U.S. companies have reconstruction contracts with the U.S. government, and although Iraqi entrepreneurs and regional firms have begun businesses, major American concerns have refrained from putting their capital at risk.

Their absence clamps a sharp brake on potential growth, countering the bullish picture painted by the administration.

The president’s view “is a good bit too rosy,” said an American business advisor who has spent most of the last year in Baghdad trying to arrange foreign investments.

“Where are the big U.S. companies? I don’t know of any,” said the advisor, who requested anonymity because of his dealings with U.S. officials. “The safety, the services they want -- they’re just not there yet.”

Consumer products giant Procter & Gamble Co., for example, has formed a joint venture with five members of a prominent Iraqi business family, yet is waiting to see when it will be safe enough to get more involved. The company is concerned about physical danger as well as the uncertainty of the business climate -- “the whole combination,” said Randy Chinchilla, a P&G; spokesman.

“None of our employees is in the country at this point,” Chinchilla said. “We’re just going to monitor things.”

PepsiCo Inc.’s renewed partnership with the Baghdad Bottling Co., announced in January, has been frequently cited as the flagship example of direct foreign investment in Iraq.

But Richard Detwiler, a Pepsi spokesman, said widespread reports that the company had shelled out $100 million for one-third of the bottling company were mistaken. Instead, PepsiCo gave the bottler a local franchise, which limits the risk to PepsiCo’s employees and capital.

General Electric Co. sent a group of staffers into the country this year to scout opportunities for its medical products unit. But GE began pulling its workers out in April as violence increased, a spokesman said.

Several multinationals have taken the first steps to investing by setting up joint ventures with Iraqi partners. Others distribute their products with the help of Iraqis and others in the region.

Michael Fleischer, director of the CPA’s Office of Private Sector Development, said the suppression of the Iraqi private sector under Saddam Hussein had delayed postwar development.

“The systems really aren’t in place to put together the kinds of [foreign investment] numbers you’d get in a developed country,” Fleischer said. “Some of the things you might expect are still a little bit down the road.”

He noted that it took four years after the fall of the Soviet Bloc for Poland to attract substantial foreign investment. “I think we are where one would expect to be at this stage in Iraq’s emergence from tyranny,” Fleischer said.

He said dozens of foreign companies had investments of some size in Iraq and insisted that Iraqi entrepreneurs had begun an economic revival evident in the consumer goods trade that was popping up everywhere.

“The entrepreneurial spirit of this country springs up like wildflowers if given a chance,” he said.

William H. Lash III, a U.S. assistant secretary of Commerce, said he was beginning to see plans to develop office space, shopping malls, discount stores and hotels -- the kinds of projects that signify economic revitalization.

“They’re getting established with capital from Iraqis around the world, mostly in the United States,” he said.

If Iraqis are demonstrating an entrepreneurial spirit, it shows they are willing to face risks that frighten off foreign investors, U.S. businesspeople say. Iraqi merchants are putting up cash to truck in goods from abroad. But without insurance, they must be willing to absorb losses if shipments are hijacked or destroyed, U.S. executives say.

Entrepreneurs also must be more willing to accept the sky-high costs of doing business. Hiring security staff can eat up 20% of revenue; insurance, if it can be found, can cost 10% of revenue or more.

Borrowing in Iraq is difficult because the banking industry was crippled under Hussein and is still trying to get organized. Iraqi authorities have given banking licenses to three foreign companies, but so far none has opened a branch in the country.

Iraq’s former U.S. administrator, L. Paul Bremer III, introduced rules designed to foster a market economy and open the country to foreign investment.

The regulations permitted 100% foreign ownership of companies, except those in natural resource industries, for example. But many businesspeople remain concerned that next year’s elections may herald a return to the tighter constraints on business that are common in the Arab world.

“The CPA put in place some pretty decent reforms, but there are still a lot of things that lie in the way of reaching that vision,” said Bathsheba Crocker, co-director of the Post-Conflict Reconstruction Project at the Center for Strategic and International Studies in Washington.

The outside world is also waiting to see how Iraq deals with the fundamental challenge of reforming government-controlled industry and agriculture, which were unwieldy and inefficient in Hussein’s era.

The CPA planned to sell off lethargic nationalized industries last summer but shelved the project in the face of stiff Iraqi opposition.

Some analysts say that until Iraq reforms those sectors and jettisons food and fuel subsidies that undermine productivity, it will not have a real economy.

Employment is concentrated in “short-term aid projects, old state industries and government [and] a bubble in the service sector,” Anthony Cordesman, a veteran Iraq watcher at the Center for Strategic and International Studies, wrote recently. “There is no momentum as yet behind the broad structural reforms vital to creating stable jobs and economic growth.”

Despite the administration’s optimism, the State Department is offering a more sober assessment of business prospects. A current bulletin warns that conditions are “extremely dangerous” and cautions interested investors about antiquated infrastructure, a financial system in the process of being rebuilt and an absence of commercial aviation.

“Telecommunications are very poor,” the bulletin reports. “Medical stocks and supplies are severely depleted. Medical evacuation to the U.S. may cost in excess of $50,000.”

Despite formidable obstacles, a leading Iraqi American businessman said he had seen a new confidence among entrepreneurs he knew, inspired by the restoration of sovereignty and the emergence of an interim government.

“The mood is one of optimism,” said Sam Kubba, who is involved in a venture with a Texas company to market low-cost homes. But he acknowledged that multinational firms remained wary.

“They’re going to wait and see,” Kubba said. “They think it’s a bit too hot now.”