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Sectarian Violence Slows U.S. Private Investments in Iraq

BY Admin  May 15, 2007 at 4:15 PM EDT

The Iraq pavillion at Rebuild Iraq 2006

Only six companies with U.S. connections signed up for Rebuild Iraq 2007, compared to about 100 American-connected companies that participated in the Iraq rebuilding tradeshow Outreach 2004.

Three years ago American companies appeared eager to take part in the multi-billion dollar effort to get Iraq’s infrastructure and service systems working again, event organizers said.

Now, despite relative success by some companies in Iraq, the constant stream of images of violence and destruction has made people hesitant to consider the option, said Giles Hazel, project manager for the New Jersey-based company that coordinated the American pavilion at Rebuild Iraq.

“I think there is a general apprehension about being and/or doing business in the Middle East,” Hazel said. “Obviously, there are a number of people there working, but from stateside, there is a rather jaundiced view of their comfort of doing business in the area.”

The greatest impediment to development in Iraq is “not going to be the conventional set of economic policy issues … it’s going to be the security matter,” Frank Lavin, the U.S. undersecretary of commerce for international trade, told an audience at the Center for Strategic and International Studies in March.

The situation, however, is not helped by the economic challenges that remain, including the Iraqi economy’s resemblance to an Eastern European, state-dominated system, Lavin said.

The oil sector has traditionally provided the bulk of foreign earnings in Iraq, but still has trouble wooing foreign companies because of security and a lack of industry structure. A new draft oil law is expected to ease those concerns by setting out rules and regulations for the industry, but has yet to be approved by the Iraqi parliament.

In other sectors, some well-known American companies have carved out niches in Iraq, and many small companies are succeeding in the information technology and communications technology sectors.

Procter & Gamble is distributing household products like shampoo and toothpaste, while United Parcel Service has been moving an average of 100 trailers of goods a month into Iraq.

The need for construction has remained high as rebuilding efforts continue, luring some new companies to consider entering the Iraqi market.

Lite-Form Technologies, a small company in South Sioux City, Neb., that manufactures concrete forms for use in construction, sold a mini plant to the Wara Construction Co. in Kuwait City in 2005, and the partnership has grown with the goal of eventually introducing the technology into Iraq.

Wayne Fenton, the company’s business manager, said the relationship with the Kuwaiti company is essential.

“Wara, with their position in the Middle East, have a better handle on attitudes or lifestyle or political atmosphere,” Fenton said. “We’re a small company in Nebraska; don’t know the ins and outs of doing business in Middle East.”

Some of the companies that are already succeeding in Iraq credit a lengthy presence in the greater Middle East, as well as personal contacts with Iraqi and Arab businessmen.

Procter & Gamble has been operating in the Middle East since 1958, beginning with Saudi Arabia. To get its household products such as diapers and shampoo into Iraq, the company exports from distribution centers in Egypt or Saudi Arabia and works with a distributing company in Iraq to get the items on the shelves at grocery stories and pharmacies.

Scott Miller, the director of global trade policy for Procter & Gamble, said the company has a business model that allows it to enter new markets at low capital risk.

“It is not unlike the way we would enter almost any market fromscratch,” Miller said of operations in Iraq.

Procter & Gamble does not have many concerns about becoming a target of violence in Iraq because its brands are so well-known by way of Arab satellite television and are not considered exclusively American, Miller said. In addition, packaging is in Arabic.

“In my view, there are brands that have uniquely American images. Our brands tend not to carry that,” said Miller.

Smaller companies, while lacking the Middle East-based distribution centers of large corporations, have found ways to get their products into the country. The health products company 21st Century HealthCare Inc., headquartered in Tempe, Ariz., ships products from Amman, Jordan, to distributors in Mosul and Baghdad.

A presence in the Middle East since 1997 has made the transition into Iraq easier for 21st Century HealthCare, said Craig Rochette, vice president of international business development.

“The opportunity to succeed in Iraq was based on it being a virgin territory for access to commercialized products,” Rochette said.

Although Rochette said one logistical risk for 21st Century HealthCare’s Iraq operations is that a shipment could get intercepted from Jordan, he was careful to avoid sharing specifics about the on-the-ground distributors in Iraq. There are still safety concerns for Iraqis who work with American businesses, which can be a target of violence, he said.

“Insurgents can become hostile towards those entrepreneurs,” said Rochette.

Undersecretary of Commerce Lavin started two initiatives earlier this year to find ways for U.S. and Iraq businesses to work together and to examine the environments in Iraq that are most conducive to business.

The Kurdistan region of Iraq, with its organized regional government and relatively stable economy, is a useful location for helping American companies get established before they spread their operations over the rest of the country, Lavin reported.

But changes also will have to occur in underdeveloped private sector. Some of former Iraqi leader Saddam Hussein’s 192 state-owned enterprises are still functioning and the government ministries still play a direct role in the economy.

Despite the push for economic reforms such as establishing credit facilities and clear titles for land and other assets, Lavin told the CSIS audience that any conversation about industry there “has to begin with a very candid discussion of the security challenge in Iraq.”