OVERVIEW OF THE IRAQ OPPORTUNITY
Doing Business in Iraq
Amman, 5th June 2003
Achmed Al-Shahrabani
McKinsey & Company, Inc.
AGENDA
Overview Iraq
Economic scenarios for Iraq
Required investments
AGENDA
Overview Iraq
Economic scenarios for Iraq
Required investments
OVERVIEW IRAQI GEOGRAPHY
Total area: 437,000 m2
Limited arable land
Arable land: 11%
Permanent crops: 1%
Desert: 88%
Largest governates
Baghdad ()
Nineveh ()
Basra ()
Varying climate (Baghdad)
Summer temp: 35-50º
Winter temp: 5-15º
Rainfall: 155mm/year
Source: Country Watch, CIA world fact book
Car transport
39,000 km paved roads
765,000 privately registered passenger cars
266,000 privately registered trucks
Air
Major airports in Baghdad, Basra and Mosul
Three major railway routes
Baghdad–Kirkuk–Irbil
Baghdad–Mosul–Yurubiyah
Baghdad–Maagal–Umm Qasr
Telecom
3% penetration, no mobile network
Utilities
250 water treatment facilities
Power generation capacity of 9500 (pre 1990), currently at 1800MW
Geography and climate
Infrastructure
The majority of Iraq is characterized by desert
Source: World outlook, EIU country risk report Iraq
50% of population younger than 16 years
28% of population is labor force
Approximately 51% males
75% of population resides in urban areas
There is an estimated 1m–2m Iraqi’s living in exile
Fertility rate –5 children per women
Adult literacy at 54%
million foreign workers
Key facts
1980
1985
1990
1995
2000
2002
CAGR 3%
DEVELOPMENT IRAQI POPULATION 1980 TO 2002
Iraqi population amounts to more than 24 millions
Million
Source: CIA world fact book
100% =
Others
Arabs- Shia Muslims
Kurds – Sunni Muslims
4
62
12
Arabs – Sunni Muslims
22
ESTIMATE
POPULATION SIZE BY ETHNIC GROUP
Shia Muslims form Iraq’s ethnic majority
%
Adult literacy at 54% (vs. 75% in Iran)
* From 6 to 23 years
Source: EIU country profile Iraq 2002
1980
1998
EDUCATION ENROLMENT RATIO FOR ALL AGES* - 1980 VS. 1998
An increasing number of children does not receive formal education
ESTIMATE
Source: Country Watch
Proven reserves
Unproven potential
Total
Gas
Trillion m3, 2001
Oil
Billion barrels, 2001
OVERVIEW OF IRAQ’S NATURAL OIL AND GAS RESERVES
Iraq has one of the largest natural oil and gas reserves…
ESTIMATE
Source: BP Statistical review, 2002
1. Saudi Arabia
2. Iraq
3. UAE
4. Kuwait
5. Iran
Oil, proved reserves
Billion barrels, 2001
Gas, proved reserves
Trillion m3, 2001
1. Russia
2. Iran
3. Qatar
4. Saudi Arabia
5. UAE
10. Iraq
RANKING OF BIGGEST NATURAL OIL AND GAS RESERVES WORDWIDE
… which are the second largest in oil and the tenth largest in gas
ESTIMATE
* Purchasing power parity method, current prices
Source: CIA World fact book; Country Watch; EIU country risk report on Iraq 2003
2002
50-60
25-35
1980
DEVELOPMENT OF IRAQ’S REAL GDP* - 1980 TO 2002
Over the past decade, Iraq’s real GDP fell by 50%…
USD billion
ESTIMATE
-50%
GDP estimates for 2002 subject to wide variation (USD 24-60 billion)
* Purchasing power parity method, current prices
Source: CIA World Factbook; Country Watch
2002
1980
ESTIMATE
DEVELOPMENT OF IRAQ’S REAL GDP* PER CAPITA - 1980 TO 2002
… and purchasing power parity on individual level even further
USD thousands
GDP/capita estimates subject to wide variation (USD )
-70%
Source: Global Insight WMM . 2003
Iraq
Saudi
Arabia
COMPARISON OF GDP DEVELOPMENT IRAQ VS. SAUDI ARABIA - 1970 TO 2000
Iraq has suffered a significant reduction in GDP over last 25 years
in billion USD in prices and exchange rates of 2000
Source: Global Insight WMM . 2003
Iraq
Saudi
Arabia
COMPARISON OF GDP PER CAPITA DEVELOPMENT IRAQ VS. SAUDI ARABIA - 1970 TO 2000
In the late 70ties Iraq’s GDP per capita was at par with Saudi Arabia
in ‘000 USD in prices and exchange rates of 2000
* Based on a GDP of USD30 billion and a population of 24 million
Source: EIU country profile Iraq
Jordan
Iran
Iraq
Saudi Arabia
Syria
*
ESTIMATE
COMPARISON OF GDP PER CAPITA - 2002
Iraq’s current GDP per capita is comparable to Syria and Iran
USD thousands
Source: Economist intelligence unit 2002;
Iraqi inflation rates
%
1996
1997
1998
1999
2000
Exchange rates
Iraqi Dinar per USD (black market rate)
Huge budget deficits lead to “printing of money”
BUT: Official exchange rate has been ID 0,31 to the USD since 1983
2001
2002
1996
1997
1998
1999
2000
2001
2002
Current exchange rate ID 900- = 1 USD
ESTIMATE
DEVELOPMENT OF INFLATION AND EXCHANGE RATES – 1996 TO 2002
Iraq has shown high inflation coupled with strong depreciation of the currency
Source: EIU country data
External debt $bn
Iraq
Syria
Jordan
Iran
230-485
10
91
113
% of GPD
60-130
Main causes of uncertainty are
Accrued interest
“Assistance” funds in Iran-Iraq war
Claims following Gulf war 1991
ESTIMATE
COMPARISON OF EXTERNAL LIABILITIES - 2001
Iraq has significant liabilities and can be considered bankrupt
* Estimates range from $ –$
Source:Reuters; Institute for international Economics
25
18
13
10
Saudi Arabia
Gulf States excl. Kuwait
Kuwait
Paris Club excl Russia, France
8
Russia
8
France
2
USA
3
Commercial Bank Creditors
2
Bulgaria
2
Poland, Czech, Romania
1
Multilateral Institutions
1
Yugoslavia
2
Trade Claims
24
Others
Total external debt
119*
14-25
Kuwait reparation payments
133 – 144
Total claims
Iraq regarded the loans from Saudi Arabia and Kuwait as grant payments for its 1980 war against Iran
Comments
Creditor
Amount – principal and overdue interest
ESTIMATE
BREAKDOWN OF IRAQI LIABILITIES – 2001
Iraq’s liabilities are mainly ‘loans’ from the Gulf states granted to Iraq in the 80ties during the war with Iran
(USD bn)
The IMF and World Bank are owed less than $200m
Source: EIU Country profile Iraq 2002
France
Australia
China
Jordan
Top 5 import sources
Top 5 export destinations
.
France
Jordan
Italy
Spain
Italy
Mainly oil exports within the food for oil program
MAJOR IRAQI TRADING PARTNERS - 2001
France is most important supplier, the US most important customer of Iraqi products
USD million
AGENDA
Overview Iraq
Economic scenarios for Iraq
Recent developments
Source: McKinsey
“Good standard”
1
Assumes the non-oil sectors of the Iraqi economy grows modestly at a CAGR of 3-5% over the next 10 years (overall GDP growth incl. oil 9-11%)
“Best in Class”
2
Assumes the non-oil part of the the Iraqi economy grows strongly at a CAGR of 7-9% over the next 10 years (overall GDP growth incl. oil 11-13%)
“Distinctive”
3
Assumes the non-oil sectors of the Iraqi economy grows aggressively at a CAGR 12-15% over the next 10 years (overall GDP growth incl. oil 13-15%)
ESTIMATE
FOR DISCUSSION
THREE DEVELOPMENT SCENARIOS
Iraq’s In the ‘World Class’ scenario Iraqi GDP per capita could reach 4,000 USD by 2013
Non-oil
Sectors
Oil production level 2008
Oil production level 2013
4-5 million barrels per day
6-7 million barrels per day
Oil
Sector
+
*) Population in 2003= 24 million, 2008=29 million, 2013=33 million
Source: McKinsey
GDP development 2003- 2013
(in bn USD)
GDP per capita* 2003-2013
(in ‘000 USD)
ESTIMATE
FOR DISCUSSION
THREE POTENTIAL DEVELOPMENT SCENARIOS
In the ‘distinctive’ scenario Iraqi GDP per capita could reach 4,000 USD by 2013
1
“Good Standard”
2003
2013
2008
53-63
73-86
2003
2013
2008
30
14%
6%
11%
3%
2
“Best in class”
2003
2013
2008
57-67
83-98
2003
2013
2008
30
16%
8%
12%
5%
3
“Distinctive”
2003
2013
2008
63-75
102-126
2003
2013
2008
30
18%
11%
15%
8%
COMPARISON OF IRAQ WITH SAUDI ARABIA
Source: Global Insight WMM . 2003
GDP per capita comparison
‘000 USD
GDP comparison
bn USD
65
145
20
155
30
225
5
16
1
10
1
10
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
1980
1990
2003
1980
1990
2003
70-90
300-320
80-100
300-320
100-130
300-320
9-11
9-11
9-11
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
Iraq
Saudi
GDP (bn USD)
GDP per capita (‘000 USD)
GDP (bn USD)
GDP per capita (‘000 USD)
GDP (bn USD)
GDP per capita (‘000 USD)
2
3
1
2013
2013
ESTIMATE
FOR DISCUSSION
AGENDA
Overview Iraq
Economic scenarios for Iraq
Required investments
* Assuming a capital productivity of
Source: McKinsey analysis
GDP 2003
(bn USD)
30
200-300
Investment required* (bn USD)
1
GDP 2013
(bn USD)
70-90
Investment required* (bn USD)
2
250-350
GDP 2013
(bn USD)
80-100
Investment required* (bn USD)
3
350-500
GDP 2013
bn USD
100-130
ESTIMATE OF REQUIRED INVESTMENTS INTO IRAQ OVER THE NEXT DECADE
To achieve the ‘World Class’ scenario Iraq’s economy requires USD 250-350 billion in investments, most of which will have to be FDI, over the next decade
ESTIMATE
FOR DISCUSSION
Assuming an average capital productivity of
Source: Global Insight; McKinsey analysis
Oil and gas
Construction
Community, social and personal services
Agriculture
Retail/Wholesale
Communication incl. telecom
Manufacturing
Transportation
Financial services incl. Real estate
Other (incl. Utilities)
Sector size - 2008
Share of GDP in % in 2008
60
10
7
5
5
4
3
3
2
1
34-42
6
4
3
3
2-3
2
1-2
1
1
100
ESTIMATED POTENTIAL SECTOR SIZE
By 2008, Iraq’s economy is likely to continue to be dominated by the Oil/gas sector
ESTIMATE
bn USD
57-67
Total
Scenario 2: GDP growth rate at 11-13%
GDP as an indicator of the capability of an economy to ‘add value’
Source: Global Insight, McKinsey analysis
By 2010 Iraq can generate annual oil revenues of about USD 44 billion (assuming 80% export and a price of USD 20 per barrel)
Source: PFC Economy
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Raising production to 6m b/d requires USD 30-35 billion of investments
Rehabilitating of existing infrastructure will require USD 3-6 billion of investments
ESTIMATE
ESTIMATED IRAQI OIL PRODUCTION
Increasing Iraq’s oil capacity will require significant investments
m barrel per day
Source: McKinsey
Oil & gas
Reestablishing and increasing oil production capacity to 6-7 million barrels per day by 2010
USD 35-40 billion
Utilities
Re-construction of basic infrastructure such as transport facilities, telecommunications and utilities (power capacity currently at compared to pre 1990)
USD 10-15 billion just for electricity and telecom
Estimates for rebuilding Iraq vary from about $20 billion a year for several years to as much as $600 billion over a decade because the scale of reconstruction is difficult to estimate
Education
Rebuilding and upgrading of primary, secondary and tertiary educational institutions
USD 6-12 billion
Health care
Reestablishing pre 1980 health care facilities and standards
USD 10-20
billion
ESTIMATE
Transport
infrastructure
Rebuilding 40,000 km of paved roads, 3 main railway lines, 3 main airports, 2 ports
Several billions
Housing/offices
…………
Rebuilding Iraq’s basic hard infrastructure will be challenging and will require substantial investments over the next decade
ESTIMATED INVESTMENT RQUIREMENTS
Industrial
infrastructure
Rebuilding Iraq’s industrial base (petrochemical, building materials, mining, consumer goods, etc.)
?
Source: McKinsey, United States Department of Defense, USAID Web site
USAID CONTRACTS/GRANTS
Awarded contracts and grants
Personnel Support (Awarded to International Resources Group, 7/2//03)
Seaport Administration (Awarded to Stevedoring Services of America, 24/3//03)
Primary and Secondary Education (Awarded to Creative Associates, 11/4//03)
Local Governance (Awarded to Research Triangle Institute, 11/4/03)
Capital Construction (Awarded to Bechtel, 17/4/03)
Theater Logistical Support (Inter-agency agreement awarded to the Air Force Contract Augmentation Program (AFCAP) on 17/2/03)
Airport Administration (awarded to SkyLink Air and Logistics support on 5/5/2003)
Public Health (Awarded to Abt Associates, 30/4/03)
Back to School Campaign (Awarded to UNICEF, 8/4//03)
Health Water and Sanitation Services (Awarded to UNICEF on 28/3//03)
Health Strengthening Systems (Awarded to WHO, 28/3//03)
Community Action Program (Awarded to number of relief organizations incl. Mercy Corps, IRD, Save the Children Federation, 27/05/2003)
NOT COMPREHENSIVE
Up to USD 680 million
Up to USD 168 million
Up to USD 63 million
UASAID has awarded an number of contracts and there are about USD billion in funds available to rebuild Iraq
Available fund sources:
USD billion of frozen Iraqi government assets in the US.
USD 700 million of Iraqi government cash seized in Iraq.
USD billion in pledges from the international community and other assistance offers.
USD billion appropriated from US Congress for reconstruction.
Source: McKinsey
Create an enabling and open economic environment
Address key economic governance issues such as taxation, land ownership, company laws, industry de-/regulation and investor protection
The implemented political and economic governance model will be essential for building investor confidence
Implementing the ‘right’ long-term economic governance model will be essential for attracting the foreign investment necessary to rebuild Iraq
FOR DISCUSSION
KEY REQUIREMENTS TO ATTRACT FOREIGN INVESTMENTS
Build a constitutional state
Implement the key building blocks for an constitutional state with an independent judicial system
Establish an accountable civil service
Build the foundation for an efficient, effective and accountable administration
Source: Press clippings
“[Iraq] will be an example of a new Arab Charter that champions internal reform, greater political participation, economic openness and free trade” – George Bush
SELECTED COUTES
“Iraq is a test case of the US ability to engender democracy and market economics in the middle east” – Senior US Official
“The US is hoping to establish a free market economy in Iraq: … privatisation of the state-owned businesses … forming a stock market … and fundamental tax reform” – WSJ
Iraq is likely to have an economic framework that is influenced by the US model
FOR DISCUSSION
Source: Press clippings
How do the changes in Iraq affect the economic governance structures in the region and will other countries in the region be ‘forced’ to open up their economies to stay competitive?
What is the economic and political impact of a potential drop in oil prices caused by an increased in Iraq’s production and what will be the future of OPEC?
How can regional companies benefit from expected large investment requirements to rebuild Iraq and how will position themselves to capture the opportunity (., consolidation, alliances) ?
KEY ISSUES FOR THE REGION FOLLOWING THE REBUILDING OF IRAQ
……which will have impact on other economies of the region
FOR DISCUSSION
THANK YOU
This template is not designed for Notes view printouts.
Only use this Template for OnScreen presentations to large groups of 50+.
To have the option of using the Notes Page for print outs and Slide view for OnScreen presentations, use the ‘U_Template 2000’.
Iraq population amounts to in 2002
Increasing number of children did not receive formal education over the past years
Iraq’s GDP per capita is comparable to the level of Syria and Iran
Iraq has demonstrated high inflation coupled with a decrease of the Dinar
Iraq is heavily indebted
Iraq is heavily indebted
Iraq has demonstrated high inflation coupled with a decrease of the Dinar
Iraq is heavily indebted
Iraq is heavily indebted
