The next emerging market? Iraq sets out its stall

Iraq's governing class is in town with a message for Western investors: spend your money with us. Sarah Arnott reports

Iraq is open for business – such is the message from a stellar line-up including the Prime Minister, Nouri al-Maliki, and the two UK Cabinet ministers at the Invest Iraq conference in London today.

In the aftermath of 20 years of sanctions, strife and upheaval, the post-Saddam state has a pressing need for infrastructure investment – and an oil price back down to the $50-per-barrel mark has left the Baghdad government unable to fund the mammoth reconstruction on its own. But the recession battering economies around the world might just prove to be to the war-torn country's advantage. Notwithstanding the bomb that killed 150 people in the capital last week, the febrile security situation has improved. And with so much financial uncertainty elsewhere, Iraq's potential is attracting more attention.

Hussein al-Uzri, the president of the Trade Bank of Iraq (TBI) – who is also at today's conference – said: "We want to convey the message that Iraq is open for business and is a unique opportunity for investors. Until 2003, the private sector was on a very short leash, but it is now taking back its role in the economy. The last six years have been very difficult, everything in the country has been taken apart and re-made. But we are moving in the right direction."

The scale is vast. Iraq needs $400bn (£339bn) of infrastructure just to catch up with the needs of its existing population of 28 million. The wish list is endless: from power plants, to water systems, to road and rail networks. The country needs 25 megawatts of electricity but produces less than six; there have been no new hospitals for decades; some 7,000 new schools are necessary just for today's generation of children; 50 years ago Iraq was a net exporter of food, now 70 per cent is imported and it needs fertiliser plants, agricultural investment and food production businesses to restore the balance. Even the world-beating oil sector is sadly undernourished. Iraq's 119 billion-barrel oil reserves constitute the second largest in the world. But with no exploration since the 1980s even that may be a considerable underestimation, and yet sub-standard refinery capacity means the majority of oil products are imported.

Meeting the requirements of even a single sector would be enough to alter the economy radically, says Mr Uzri. The country needs 2.5 million new houses, for example. "That by itself will stimulate the whole economy because it will need cement plants, steel mills, labour, banking, mortgages," he said.

With oil at $147 per barrel last summer, the government in Baghdad had more options. But with less money sloshing around the public sector, a bigger slice of the pie will fall to commercial investors. Private investment has been growing since Saddam Hussein was toppled in 2003. The TBI – which is a state-owned bank established that year to facilitate international trade in the wake of the expired UN oil for food programme – has issued $9.1bn-worth of letters of credit in the past year alone and made a quarter of its $359m profits in 2008 from the private sector.

But tens of billions of dollars of Iraqi capital are still held outside the country – mainly in Oman, Beirut and Dubai – and part of the TBI's job is to convince investors that there are viable prospects behind the continual news reports of lawlessness, violence and chaos. "The role of the banking sector is to attract those funds back home," said Mr Uzri. Infrastructure projects are gathering pace. A new power plant in Erbil – which has upped Kurdistan's electricity capacity from just four hours per day to round-the-clock – is a case in point. Funded entirely from Iraqi capital, the power station went from letter of credit to producing electricity in just 18 months, and investors will see a return within two-and-a-half years.

There is also a major role for foreign investors – hence today's conference, which is expected to be attended by about 250 companies including Royal Dutch Shell, Rolls-Royce and GlaxoSmithKline.

Private equity groups are also sniffing around. Fairfax, a London-based fund, plans to put $200m into Iraq this year, and the TBI is putting together a $250m fund of its own on the strength of interest from sovereign wealth funds. Sir Claude Hankes, an adviser to the TBI, says the potential for Iraq – with its large population, educated middle class and trading ethic – is unmatched since the Far East of the 1970s. And investors are starting to pay attention. "The opportunities are enormous and unlimited," he said. "People were thinking: why have the problems and security issues in Baghdad when we can make billions somewhere else? But the rest of the world is changing, Iraq's security has improved and people are beginning to focus on the opportunities now."

The brave few have already taken the plunge, mainly companies from nearby Gulf states, Iran and Turkey. But Chinese groups are also showing a growing interest, as are the French. British companies are, so far, less well-represented, particularly outside the Basra area where UK troops were stationed. Part of the problem in establishing a secure trading relationship between the two countries is the difficulties Iraqis have in getting a UK visa. As a result, the UK is missing out, both on the huge market for training the Iraqi workforce, and on building strong links with the country's business class. "Not to be training as many Iraqis as we possibly can, right here and right now, is a fundamental error in terms of developing trade with Iraq," said Sir Claude.

But kidnappings and roadside bombs are not the concern for potential investors. A stable economy needs a stable banking sector. The TBI's rapid growth is emblematic of an improving situation. Annual results for 2008, published yesterday, reported profit growth of 41 per cent, total assets up 64 per cent to $10bn and share capital up by more than 340 per cent to $427m. But there is much to do. There are now six state-owned retail banks in the country, and about 32 private banks, including some international institutions such as HSBC.

But only about 2.7 million Iraqis have bank accounts, less than 10 per cent of the population. And between them, there are only about 600 branches in total, a very low per-capita ratio compared with a developed, Western economy. Iraq is still very much an "underbanked" country, says Mr Uzri. "In the UK there is around one bank branch per 1,300 or so of the population, in Iraq that is more like 45,000," he said. "Cash is still king. Most transactions are in cash, from buying groceries to buying buildings."