Old friends new opportunities

Iraq’s reconstruction presents a window of opportunity for other Arab countries, and there is a mini boom underway in neighbouring Jordan as businesses vie for a piece of the pie

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By  Massoud Derhally Published  September 4, 2003

|~||~||~|When the bomb outside the Jordanian Embassy in Baghdad went off in early August, it not only sent tremors throughout the occupied country but put Jordanian-Iraqi relations under the spotlight. No sooner had the dust settled, than rumours about the motives for the attack were circulating in the press. Jordan had just given refuge to daughters of the deposed Iraqi dictator. Some were saying loyalists to Ahmad Chalabi, the mathematician turned politician were linked to the attack. There was of course talk of an alleged Al Qaeda link. Whoever is behind the attack and whatever the objective(s) may have been, what is certain is that relations between the two countries, traditionally a delicate balancing act, are in fact more deep-rooted than may seem.

Until the bloody revolution of July 14, 1958 when Iraq’s King Faisal II (shown on opposite page) and Prime Minister Nuri Al Said were murdered, relations between the two countries were more than cordial. They were fraternal. Jordan and Iraq had entered a federation to counter Nasserism in the Arab world, but the turning of the army on the monarchy was an indication of how things could go terribly wrong.

While Jordan’s stability was preserved, Iraq would go through a number of coups and two major wars. At each juncture though, the Iraqi-Jordanian relationship was able to whether the storm unfazed. During the Iran-Iraq war and after Iraq was removed from Kuwait in 1991, Jordan was able to maintain healthy and strong trade relations with Iraq. Just before the US unleashed its shock and awe war on Iraq this past March, Jordanian-Iraqi trade relations were, putting aside the occasional political hiccup, a prime example of economic cooperation.

“It was fulfilling for us and it could be a model for Arab economic integration as it was a two-way relationship,” says Khaldun Abu Hassan, former chairman of the Amman Chamber of Industry. Iraq was the biggest economic and business partner whereby the balance of trade was well over US $1 billion per year between the two countries. Jordan imported oil, crude oil, and petroleum products at the cost of US $800 million, which came at a discount of 50%. That, says Abu Hassan was “very supportive to the government budget and thus there was no burden on our foreign exchange reserves.”

Jordanian industry also benefited from Iraq. Under the oil for food protocol, Jordan’s exports to Iraq exceeded US $420 million in 2001. In exchange, Iraq supplied Jordan with oil below the world market price. At the peak of economic relations with Iraq, Abu Hassan explains, there was a fleet of 12,000 trucking units, which, directly and indirectly, was a source of income for thousands of Jordanian families. The port of Aqaba also handled around six million tons annually, all destined for Iraq. “It was a comprehensive relationship whereby you had industry, financial services, and trading,” says Abu Hassan.

Revival of Jordanian-Iraqi Trade relations

Today, nearly six months after the fall of Baghdad, Jordan is very much an integral part of Iraq’s reconstruction. The red sea port of Aqaba is thriving and business is booming, with massive quantities of goods heading for Iraq. “There is congestion already in the port with nine vessels waiting, which we haven’t seen in a long time and there are thousands of second hand cars being transported as well,” says Akel Biltaji, chief commissioner and chairman of the board of the Aqaba Ports Corporation and the Aqaba Special Economic Zone Authority (ASEZA.)
That the port of Umm Qasr has taken time to open up is also a blessing to Aqaba. Cranes are still not fully operational and some more dredging needs to happen before all its berths can accommodate ocean-going vessels. Companies also complain about high service fees; while others remain concerned about security threats. This, coupled with the current grace period, or waiver on customs duty has given a boost to Aqaba, creating a wave of second hand car shipments to Iraq. Aqaba’s shipping and handling rates are low and cars are selling for as little as $1000 to $4000.

With over 45,000 cars at the port and container ships waiting in the water for space clearance to offload their shipments, an optimistic Biltaji has no complaints. “We have handled over 60,000 cars in the last three months and whoever is involved in it is making a buck. We are the only port of entry for cars and now we lack car transporters. There are no second hand cars in Jordan now,” explains Biltaji.

Jordan has also taken steps to revive trade relations among Iraqi and Jordanian businessmen. Iraq topped the list of Jordanian imports at 20% overall share, followed by the US at 19% before the war. The Amman-based investment bank, Atlas Investment Group (AIG), estimates Jordanian exports to Iraq will increase between 20% and 30% as the situation gradually improves.

In July and August Jordan hosted to several conferences dedicated to Iraq’s reconstruction. Bidding for Iraq’s mobile phone infrastructure grabbed world headlines and triggered a debate about whether Iraq would adopt the universal GSM system or settle for the CDMA technology developed by Qualcomm and currently operational mainly in North America. Jordan Telecom, which France Telecom has invested in, is close to completing the installation of a high-speed fibre optic cable link from Amman to the Iraqi border that will open up data services to Baghdad.

Other conferences cast light on the potential of the Iraqi market to Jordanian companies and how companies could co-operate. After Jordanian and Iraqi businessmen agreed to set up a joint business council in June, to boost direct relations and pave the way for bilateral commercial exchange, a joint Iraqi-Jordanian holding company, said to be the wish of King Abdullah, was established. The company, with a paid up capital of JD50 million (US $70M), will be engaged in the economic development and reconstruction of Iraq, participating in thirteen sectors and will be involved in communication, IT, health care, hospital management, education and vocational training, contracting, hotel management and real estate.
Jordanian investors seem so confident that the Amman Stock Exchange, which closed up 2.5% for the week ended March 20, the day the US led war on Iraq began, is even more robust today.
While the war was taking place and as it was ending, the market in Jordan started to pick up substantially, moving upwards in anticipation that the cloud of uncertainty would move on and that Jordanian companies would get a piece of the action, says Omar Masri, the managing director of AIG. “The market has been moving up; a major engine for it has been the abundance of liquidity in the hands of the retail and institutional investors, because of the low interest rates,” says Masri.

“People are fed up with 1-3% on their money in the bank, so a lot of this money is flowing into the exchange in the hope [that] there is something positive around the corner.”

Rebuilding Iraq’s Stock Market

And positive it is. Today, Jordanian institutions and the country’s overhauled regulatory infrastructure have a role to play in Iraq. AIG is taking the lead in piecing together the Baghdad Stock Exchange (BSE). The Baghdad market, where bustling traders once wrote prices on walls with coloured markers, was one of the world’s best performing markets in 2002, but now needs to be built from the bottom up.

“The first day we went to visit the stock exchange right after the war, we found refugees living inside. Everything was gutted, clothes hangers and laundry were [everywhere],” says Masri.

“We have taken upon ourselves to help the local authorities as well as the Coalition Provisional Authority (CPA) to get the BSE back on its feet and that’s taking a lot of time. What a lot of people don’t realise, is that in Iraq, it’s not just a regular occupation, it’s a revolution. They have scrapped everything and are basically rebuilding everything in terms of laws, systems and [even] rewriting the school books.”

That the situation in Iraq is far from stable poses tremendous risk for businesses, but it also presents a window of opportunity for Masri’s AIG. “We are trying to help set up the Baghdad Stock Exchange and ultimately what we would like to do is attract foreign strategic investors and Arab investors to come in and set up shop or acquire companies locally,” says Masri. “We would like to be part of the privatisation process when and if that takes place in Iraq and manage funds locally, but to do all that, you need to have a stock exchange, but that does not exist,” he explains.
Atlas is also acting as a go-between. It is inviting the CPA to Jordan to meet parties involved in the Amman Stock Exchange. It also arranged to have all the brokers in Baghdad, which number 40 to 50, speak with Thomas Wirges, the operations sergeant from the US led administration in Iraq, entrusted with the task of rebuilding the BSE. “We literally had to go around delivering invitations to everyone because there were no phones or faxes,” says Masri.

“Everything is co-ordinated through Washington D.C. and the US Treasury has the lead on it. We want to rebuild the BSE in two separate phases,” explains Wirges.

“In the first phase, we want to have transparency in transactions, whereby you have technology updates [to the exchange]. In phase two, the BSE would be fully automated. At this point in time we don’t know if the stock exchange will be run like the New York Stock Exchange (NYSE). It’s still premature at this point to determine what the guidelines are. The nice thing about the BSE, is that there was legitimacy to their market. It wasn’t just a pawn of Saddam.”

Privatisation of state owned enterprises (SOEs) would help facilitate phase two of rebuilding the BSE, says Wirges. Atlas is also working on helping Iraq on the privatisation front.

“There are 192 SOEs that need to be audited and the team responsible for examining the companies is looking at 52 companies at the moment,” says Masri. “Some of these companies have been looted and the team is trying to keep companies that were in a better condition afloat by pumping in liquidity and helping with management.”

Helping in the privatisation of Iraqi SOEs

Atlas is investing time and resources in the Iraqi market with no clear indication of a return on its investment. “The hope is to get the foundation there so that later we can bring a local Jordanian company and tell them there is an interesting opportunity for you to acquire one of these SOEs. That is the advisory and value added service the company is planning to offer down the road.

Masri believes there are opportunities for Jordanian companies to go and acquire existing companies and opportunities for Jordanian investors down the line.
“Iraq is virgin territory. At one point I thought before the war, and right after the war, that some of our friends in the Gulf were scheming for months for this opportunity and they have their full governmental support to penetrate the Iraqi market. They were miles ahead of us,” says Masri.

“But then as weeks went by, you realised that it’s a fluid situation, a jungle and that the fruits the Americans were looking to reap is still months away. This has worked in our favour [so that we can] catch our breath as the Jordanian private sector and position ourselves.” But a lot of what is going on at the moment is also self-initiative.

There is little in terms of co-ordination between the public and private sector. Pharmaceutical companies in Jordan are intensifying their efforts to ensure the flow of their exports to the Iraq market, which absorbed an estimated 25% of their total exports before the war.

However, turn to the banking sector and you will discover that many of the leading banks in Jordan don’t have the risk appetite for Iraq. “ Without the proper backing, be it the bank, insurance company, suppliers, it’s going to be very difficult for Jordanian companies to really penetrate the Iraqi market in a major way,” explains Masri.

A former Jordanian official says, “The immediate challenge now is to put a clear road map as to how things will unfold from an economic point of view and where the [Jordanian] private sector players will be dealing.” One thing is certain, however: out of the ashes of the Iraq war, a stronger Jordan will emerge. ||**||

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