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Opportunities for Infrastructure Financing in Iraq

Despite significant advances in many areas of infrastructure in Iraq, for example, electricity, roads, bridges, rail lines, airports, provision of potable water, and communications, much still remains to be undertaken. It is important for the Government of Iraq (GOI) to increase its ability to deliver basic services given that the Iraqi population is on a considerable growth trajectory, there are increased expectations of a higher standard of living, and there is a need to accommodate economic growth. Responding to these needs will demand considerable strengthening of infrastructure.

Funding for infrastructure1 from outside sources has decreased or been depleted and the GOI has seen a leveling off in available budgetary funds for investment in the past few years. The major source of GOI revenue is oil sales, and in recent years oil prices have declined while Iraqi production has not seen a discernible increase. Overall annual budgetary funds have been reduced, and funds specifically available for infrastructure investment have decreased disproportionately. Recent production contracts should increase oil production and GOI revenues, but this is projected to take considerable time. Given the shift in the origin of funds toward internal sources, the decline in those internal flows, and the increased demand for basic infrastructure, the GOI should look to available alternative sources for development funds. There are two major extra-budgetary sources of funding for infrastructure:

  • 1)

    International and regional organizations that provide medium and long term funding for infrastructure, including the World Bank, sovereign wealth funds, regional development banks, the Islamic Development Bank, and donor agencies, and

  • 2)

    The private sector, through such mechanisms as publicprivate partnerships and strategic production sharing arrangements, supported by export credit agencies and insurance and guarantee agencies (OPIC, EXIM Bank, MIGA, JICA, Coface, ECGD-UK). Various combinations of donors and mechanisms are possible. Private sector participation in infrastructure development must be defined in a way that allows for cashflow to be attributed to the private partner(s) and provides a risk-adjusted rate of return.

The Creation of the Working Group on Infrastructure Finance

The decision to create the Working Group on Infrastructure Finance was taken at a Conference on Opportunities for Infrastructure Financing in Iraq held in Baghdad on 21 November 2009. The conference was co-organised by the Iraqi Institute for Economic Reform (IIER), a local research institute, and the MENA-OECD Investment Programme as part of its longstanding work on improving the Iraqi investment climate. The 85 participants included representatives of the Government of Iraq, private sector operators, international banks and financial institutions (such as the World Bank and HSBC), foreign embassies, and investment promotion and research organisations. Key themes of the conference included:

  • The current infrastructure development profile of Iraq and trends over the past five years

  • Trends and challenges in infrastructure financing

  • Extra-budgetary sources of infrastructure finance involving international financial institutions and private firms, and their applicability to Iraq

  • Means of prioritising and coordinating these mechanisms in order to move forward with a national infrastructure development program

Participants decided upon the creation of the Working Group, which is charged with the following missions:

  • (1)

    Make recommendations on priority infrastructure needs and appropriate financing mechanisms,

  • (2)

    Identify issues and obstacles associated with the most applicable financing mechanisms and make recommendations to address these issues,

  • (3)

    Identify high priority infrastructure projects and prepare proposals and recommend implementation to the Government of Iraq, and

  • (4)

    Monitor project implementation.

1 Infrastructure is defined as transportation infrastructure (roads, bridges, airports, ports, rail lines); communications infrastructure; housing; and electricity generation and distribution. Infrastructure projects can be “mega projects” (dams, coast-tocoast highways, megaports, large power plants) or much smaller projects that can include communication franchises or limited highway spurs. This definition does not include humanitarian and other economic development needs, the general lack of FDI and related investment environment issues, or direct contracting with the government.

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