Through May, we spoke to experts working in different sectors in Iraq, to hear their views on challenges and opportunities in the country in 2019 and beyond.
Our intention was to build a holistic picture of Iraq’s overall business environment by providing a neutral space for business leaders to express their perspectives. Those we spoke to were free to contribute thoughts on any particular aspect of doing business in Iraq, and their views range from cautious optimism to diagnostic analysis of key problems.
In our first installment, Hussein al Bayati, commercial director of Awal Telecom, with 13 years’ experience in the sector, laments the problems holding back Iraq’s digital economic potential. We also hear from Grant Felgenhauer, Managing Partner at Euphrates Advisors LLC, who presents a broad picture of investing in Iraq’s capital markets.
It’s Time for Iraq to Seriously Invest in Internet Infrastructure
Hussein Al Bayati, Head of Business Development, Awal Telecom
It is not a secret that Iraq is one of the least developed countries in terms of Optical Fiber infrastructure. There are several justifications for this lag, like the collapse of the state in 2003, the chronic corruption, lack of expertise, and the war on terror that was still raging until late 2017.
However, there is one other very important reason from my perspective that is very important to consider, something I don’t think has had enough focus. That is the mindset of short-term profit in dealing with fiber infrastructure investments.
The strategies of decision makers in charge of communications, aligned with the government’s “socialist” mindset, have been to make the biggest direct profits possible from any service or license they provide to the private sector to invest in.
Seeing the fiber infrastructure solely as a resource to be leased to raise revenue has a critical limitation; it makes the owner and regulator of this resource price it as highly as possible and restricts others to own any part of it.
That’s why, currently, the Information and Telecommunications Public Company (ITPC) which is the commercial arm of the Ministry of Communications (MoC) and a state owned company, has the sole right to own and operate the fiber optics infrastructure in Iraq – with one exception. This is the Iraq National Broadband (INB) and still there is strong resistance against it, and ITPC is imposing its rules on INB.
So, any other company doesn’t have the right to layout fiber optic cables unless they get the approval from the ITPC, and after they finish, the fiber ownership will go directly to the ITPC. Thus, there is basically no company that can connect two points with its own fiber.
This policy of having the sole ownership of fiber underground makes it impossible for other companies to invest in developing the fiber infrastructure in Iraq since the return will be so small. On the other hand, just like all other state-owned entities, the ITPC doesn’t have enough funds or administrative ability to develop the fiber infrastructure and needs private investment to do the job.
Another issue is that the ITPC is the only entity that has the right to import the internet across Iraqi borders and sell it to internet service providers (ISPs). This monopoly makes the ITPC impose very high prices on the imported internet (more than $54 per Megabit of internet, while it’s about $5 in other countries).
The pricing strategy of ITPC is based on covering the operational expenses of the ITPC, which, like other state-owned entities, has an army of permanent employees, most of them are doing nothing except receiving inflated salaries from the government. Hence, the imposed prices are sky high, just to show that the ITPC is profitable.
These contradictions have made broadband internet development in Iraq the captive of short-sighted strategies. The whole development of Iraq’s economy and the welfare of the nation is held back just to keep the ITPC surviving.
The solution can start by changing this paradigm to a better and more effective one. By realizing the importance of broadband penetration on the economy, we can easily decide that it is much more important to think about the long-term and more sustainable positive effects of increasing access to broadband rather than focusing on the short-term direct revenue which is swallowed by the ITPC’s huge expenses, which is impeding the development of the economy.
An analysis made by the World Bank concluded that a 10% increase in fixed broadband penetration would increase GDP growth by 1.38% in developing countries. Another panel study with OECD countries was carried out to estimate various broadband impacts and found that GDP per capita growth is 2.7 to 3.9 percent higher after the introduction of broadband.
We don’t need many studies to understand the huge impact of high-speed internet services on the economy of any country. With a reliable internet connection, you will make education easier and faster, facilitating research in universities and online education. Banks will work more easily, companies can get the job done faster, and even the government companies will do better.
Finally, this is a call to officials in the ITPC and MoC to revise the pricing and licensing strategy for the fiber and internet service in Iraq and to liberate the fiber sector from monopoly. This will enable the private sector to invest and develop the fiber infrastructure for the good of the economy, and the well-being of the nation.
Unlocking Hidden Enterprise Growth Potential via Iraq’s Stock Markets
Grant Felgenhauer, Managing Partner, Euphrates Advisors
Iraq’s central economic challenge is capital formation. The country is resource rich, but capital poor. In other emerging and frontier markets, local banking systems and stock markets play a key role in channeling state earnings – in Iraq’s case, oil export revenues – into productive uses that create capital and multiply it over time. The banking sector creates capital through the extension of credit to drive investment and consumption. The stock market raises capital for local businesses to grow and expand, often providing these funds during a firm’s early years when the need is greatest and when capital is most scarce. In the last fifteen years, Saudi Arabia has raised over $40 billion for Saudi businesses through its stock exchange.
Fifteen years after the fall of Saddam, Iraq’s capital markets remain woefully undeveloped. The Iraq Stock Exchange (ISX) is one of the smallest for a country with an economy the size of Iraq, with a market capitalization of just 5.9% of GDP. This compares to 39% for Russia, Jordan (54%), Saudi Arabia (79%) and the Philippines (86%). Iraq’s banking sector is also anemic. Domestic credit is just 7% of GDP, one of the lowest in the world, hovering between Sudan (9%) and Afghanistan (4%). This, in a country that is the second largest oil producer in OPEC and that will soon be the fourth largest in the world.
For Iraq’s economic recovery to be sustainable, domestic capital markets must grow to the point where they can drive investment and growth beyond the Age of Oil. In the fifteen years after the fall of the Soviet Union, the value of the Russian stock market went from zero to over $600 billion today. There is no reason this can’t happen in Iraq. The ISX is small, but well-managed, scalable and tightly regulated. Trades are processed electronically on software licensed from NASDAQ.
What can be done to accelerate the growth of Iraq’s capital markets? There are two pieces of transformative, low-hanging fruit:
- Establish an independent custodian bank to hold investors’ shares on the ISX. Shares are currently held at the exchange itself in an outdated depository structure. Iraq is one of only three countries with a stock exchange but no independent custodian (the others being Myanmar, Mongolia and Iran – not exactly paragons of capital market innovation). We estimate over $200 million would be invested in Iraq in the medium-term following the establishment of a custodian bank.
- List a minority stake in the leading state bank, Trade Bank of Iraq, on the ISX or a foreign exchange like London. Incumbent state banks are among the most popular stocks among both domestic and foreign investors and can single-handedly transform a national equity market. Sberbank, the leading state bank in Russia, returned 22,963% to investors from 1999 to 2008. Iraq is ripe for selective privatizations.
There is unanimous agreement that Iraq must grow private sector employment and promote economic growth outside the energy sector. These goals will not be realized without healthy domestic capital markets. Promoting the infrastructure to channel oil export earnings to non-oil businesses is a pressing national priority. The past successes of other countries in a similar position to Iraq today provide a roadmap.