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OVERVIEW OF THE IRAQ OPPORTUNITY,Doing Business in Iraq,Amman,3th June 2005,Achmed Al-ShahrabaniMcKinsey&Company,Inc.,AGENDA,Overview IraqEconomic scenarios for IraqRequired investments,AGENDA,Overview IraqEconomic scenarios for IraqRequired investments,Total area:437,000 m2Limited arable landArable land:11%Permanent crops:1%Desert:88%Largest governatesBaghdad(8.0m)Nineveh(2.1m)Basra(2.0m)Varying climate(Baghdad)Summer temp:35-50Winter temp:5-15Rainfall:155mm/year,Source:Country Watch,CIA world fact book,Car transport39,000 km paved roads765,000 privately registered passenger cars266,000 privately registered trucksAirMajor airports in Baghdad,Basra and MosulThree major railway routesBaghdadKirkukIrbilBaghdadMosulYurubiyahBaghdadMaagalUmm QasrTelecom3%penetration,no mobile networkUtilities 250 water treatment facilitiesPower generation capacity of 9500(pre 1990),currently at 1800MW,Geography and climate,Infrastructure,The majority of Iraq is characterized by desert,OVERVIEW IRAQI GEOGRAPHY,Source:World outlook,EIU country risk report Iraq,50%of population younger than 16 years28%of population is labor forceApproximately 51%males75%of population resides in urban areasThere is an estimated 1m2m Iraqis living in exileFertility rate 4.55 children per womenAdult literacy at 54%1.5-2.5 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%=24.2m,Others,Arabs-Shia Muslims,Kurds Sunni Muslims,4,62,12,Arabs Sunni Muslims,22,ESTIMATE,POPULATION SIZE BY ETHNIC GROUP,Shia Muslims form Iraqs 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,OilBillion barrels,2001,OVERVIEW OF IRAQS 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 reservesBillion 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 pricesSource:CIA World fact book;Country Watch;EIU country risk report on Iraq 2003,2002,50-60,25-35,1980,DEVELOPMENT OF IRAQS REAL GDP*-1980 TO 2002,Over the past decade,Iraqs 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 pricesSource:CIA World Factbook;Country Watch,2002,1980,ESTIMATE,DEVELOPMENT OF IRAQS 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 1.000-2.500),-70%,Source:Global Insight WMM 2.Q.2003,Iraq,SaudiArabia,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 2.Q.2003,Iraq,SaudiArabia,COMPARISON OF GDP PER CAPITA DEVELOPMENT IRAQ VS.SAUDI ARABIA-1970 TO 2000,In the late 70ties Iraqs 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 millionSource:EIU country profile Iraq,Jordan,Iran,Iraq,Saudi Arabia,Syria,*,ESTIMATE,COMPARISON OF GDP PER CAPITA-2002,Iraqs current GDP per capita is comparable to Syria and Iran,USD thousands,Source:Economist intelligence unit 2002;OANDA.COM,Iraqi inflation rates%,1996,1997,1998,1999,2000,Exchange ratesIraqi 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 900-1.000=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 areAccrued interest“Assistance”funds in Iran-Iraq warClaims following Gulf war 1991,ESTIMATE,COMPARISON OF EXTERNAL LIABILITIES-2001,Iraq has significant liabilities and can be considered bankrupt,*Estimates range from$103.4$129.4bn 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,Iraqs 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,U.S.,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 IraqEconomic scenarios for IraqRecent developments,Source:McKinsey,ESTIMATEFOR DISCUSSION,THREE DEVELOPMENT SCENARIOS,Iraqs In the World Class scenario Iraqi GDP per capita could reach 4,000 USD by 2013,Non-oilSectors,+,*)Population in 2003=24 million,2008=29 million,2013=33 millionSource:McKinsey,GDP development 2003-2013(in bn USD),GDP per capita*2003-2013(in 000 USD),ESTIMATEFOR DISCUSSION,THREE POTENTIAL DEVELOPMENT SCENARIOS,In the distinctive scenario Iraqi GDP per capita could reach 4,000 USD by 2013,COMPARISON OF IRAQ WITH SAUDI ARABIA,Source:Global Insight WMM 2.Q.2003,GDP per capita comparison000 USD,GDP comparisonbn 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,ESTIMATEFOR DISCUSSION,AGENDA,Overview IraqEconomic scenarios for IraqRequired investments,*Assuming a capital productivity of 0.2Source:McKinsey analysis,GDP 2003(bn USD),30,ESTIMATE OF REQUIRED INVESTMENTS INTO IRAQ OVER THE NEXT DECADE,To achieve the World Class scenario Iraqs economy requires USD 250-350 billion in investments,most of which will have to be FDI,over the next decade,ESTIMATEFOR DISCUSSION,Assuming an average capital productivity of 0.2,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,Iraqs 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 Iraqs oil capacity will require significant investments,m barrel per day,Source:McKinsey,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,ESTIMATE,Rebuilding Iraqs basic hard infrastructure will be challenging and will require substantial investments over the next decade,ESTIMATED INVESTMENT RQUIREMENTS,Source:McKinsey,United States Department of Defense,USAID Web site,USAID CONTRACTS/GRANTS,Awarded contracts and grantsPersonnel 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 6.7 billion in funds available to rebuild Iraq,Available fund sources:USD 1.7 billion of frozen Iraqi government assets in the US.USD 700 million of Iraqi government cash seized in Iraq.USD 1.9 billion in pledges from the international community and other assistance offers.USD 2.5 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 serviceBuild 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 Iraqs 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(e.g.,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,