Infrastructure report

Market Overview

Competitive Landscape

BMI View: The domestic construction sector in Iraq suffers from a lack of expertise in key sectors and as such the country presents a range of opportunities for international firms able to fill in the gaps in technical knowledge, particularly in the transport and utilities sectors. These international firms have been able to benefit from extensive international funding, aimed at the reconstruction of Iraq's infrastructure network and are favoured over local players, who are known for their lack of transparency, delays, high costs and poor technical capacity.



Table: Key Company Financial Data

Name	Latest FY Earnings	Market Cap (USD)	Revenue (USD)	Net Income (USD)	Total Debt/ EBITDA	Interest Ratio	PE Ratio
SNC-LAVALIN GROUP INC	12/2016	5,941.45	6,398.42	193.02	1.85	5.13	22.04
LAFARGE SA	12/2014	na	17,061.77	189.97	4.96	1.64	na
ALSTOM	03/2016	6,345.17	7,599.07	3,314.17	5.76	-1.00	na
SIEMENS AG-REG	09/2016	113,748.23	88,488.71	6,055.24	3.38	7.40	17.72
HILL INTERNATIONAL INC	12/2016	193.18	520.85	-18.83	22.88	na	na
STX HEAVY INDUSTRIES CO LTD	12/2016	na	359.15	-619.41	na	-1.98	na
HYUNDAI HEAVY INDUSTRIES	12/2016	10,972.38	33,904.44	470.07	6.35	7.02	18.01
ENKA INSAAT VE SANAYI AS	12/2016	7,342.36	3,510.94	589.46	0.44	219.41	14.15
KBR INC	12/2016	2,139.95	4,268.00	-61.00	9.49	na	na
AECOM	09/2016	5,268.30	17,410.83	96.11	5.33	1.45	18.12
GENERAL ELECTRIC CO	12/2016	260,477.63	119,687.00	8,831.00	12.10	3.04	29.40

Coverage

na = not available. Source: Bloomberg

The market for construction firms and investors remains difficult in Iraq. Amid constrained public spending conditions, in January 2016 Baghdad cancelled projects worth IQD10tn (USD9bn) and postponed another 2,169 projects worth IQD37tn - which had been approved in the 2015 budget - as the government faces a severe fiscal crisis brought about by a drastic fall in its oil-revenues (85% of total revenues in 2015). In addition, the Iraqi government announced in January 2016 it would not approve new projects in the year ahead.

United States With Heavy Presence

Market Share By Company Nationality, %

21%

39%

2%
2%

3%

5%

5%

5%

9%

8%

South Korea Jordan United Kingdom Iran Others

United Arab Emirates

France

Turkey

United States

Iraq

Source: BMI Key Projects Database

Positively, funding gaps are being partially filled by World Bank and International Monetary Fund (IMF) investment, which will support the return of investment in 2017 and the reconstruction efforts. The World Bank said in July 2015 it would provide Iraq with loans worth USD1.7bn, while the IMF agreed earlier in 2015 on an USD833mn loan programme, followed by a USD5.4bn stand-by agreement in 2016.

As part of the World Bank's commitments, Iraq has USD350mn to fund emergency reconstruction in towns recaptured from IS, which is where many companies will become engaged once the situation on the ground allows for operations and development to go ahead. Nevertheless, Iraq enjoys the presence of a great

number of international firms and investors, largely due to the ongoing destruction and reconstruction of the past few decades.

The biggest international presence in the Iraqi construction market has been from US companies, with firms such as Bechtel, AECOM, Parsons and Fluor active in construction services and KBR one of the biggest employers of construction and engineering personnel in Iraq. However, their success has been largely down to the prevalence of US defence contracts, ie. housing and electricity for army bases in the country.
Yet where we had previously expected the dominance of US companies to recede due to the country's withdrawal from Iraq, recent news suggests otherwise. The US Department of State awarded construction firm BL Harbert International a contract to build and EYP Architecture & Engineering as architect for a US consulate complex in Erbil. The USD600mn project will be developed on 200,000sq m of land on Erbil-Shaqlawa Road and form the largest US consulate complex in the world, which does not point to a slowing of contracts going the way of US firms, with country wide reconstruction efforts needed and the significant but underperforming hydrocarbon industry requiring investment and expertise.
Additionally, Baker International has been awarded a multitude of contracts worth USD838mn - which will see the company upgrade Balad Air Base over three years - highlights the opportunities that still remain in defence work in Iraq.
Meanwhile, a more sustainable presence for international firms in the country may be found by entering long-term collaborations with domestic and regional firms, as exemplified by UK engineers Mott MacDonald's tie-up with Iraqi oil and gas and construction firm Khudairi Group. The pairing, which has been conceived to undertake oil and gas projects in Iraq, will provide Khudairi with standards and scale, while Mott MacDonald will receive local knowledge and experience.
The number of international companies present in Iraq is small, with many still concerned about the fragile security situation. Prior to the US-led invasion in 2003, South Korean and Japanese companies were some of the biggest players in the sector; however, only a few have returned. Although more are keen to do so, the opaque operating environment has been a barrier for some and in light of the current security situation more international firms may be deterred from entering the market.
South Korean companies Hyundai Engineering & Construction, Hyundai Heavy Industries, STX Engineering and Hanwha Engineering & Construction have all won contracts in Iraq and are leading the charge for South Korean companies re-entering the country. We also expect Chinese firms to become

increasingly active in Iraq as China moves in to replace the more risk-averse companies that have left since the American withdrawal.

European companies are also taking a notable market share in Iraq's reconstruction boom, led primarily by the French. Alstom has secured a strong position in Iraq's infrastructure sector, winning a number of contracts in the power and transport sectors as a result of a concerted effort to pursue opportunities in the country, including opening an office in Baghdad in February 2010. This has paid off, with notable contract wins including up to USD2bn in power contracts, as well as studies for a high-speed rail project between Baghdad and Basra and the Baghdad monorail. Other French companies present include

Aéroports de Paris, through its ADPI subsidiary, which won a contract in 2009 for development studies for an international airport. Other large deals include a USD1bn water deal won by Veolia. Meanwhile, Luxembourg-based General Mediterranean Holding is developing the German Ibn Hayyan Hospital complex in Baghdad. The state-of-the-art 58,700sq m project was started in 2013 and is nearing completion.

British companies are also seeking to win a share of the market. AMEC (which in 2003 teamed up with US company Fluor to bid for contracts), Scott Wilson, Halcrow and Mott Macdonald have all sought contracts in the country.

While European and US company ties have largely been driven by their military presence in the country, other players are drawing on cultural and regional ties to take a share of the market. Turkish companies have been very strong in staking a claim in the country's electricity sector, with Calik Enerji and

Enka Insaat both winning a number of contracts to build power plants. Turkish companies have also won big contracts through Iraq's huge residential construction projects, such as the 82,000 unit Sadr city regeneration awarded to Kocoglu Insaat, Kur Insaat, Kazova Insaat and Iskaya AS. Turkish firm ATK Construction will soon deliver on the aforementioned German Ibn Hayyan Hospital in Baghdad.

Gulf companies have also been active in the residential construction sector, with Jordanian and UAE firms awarded large-scale housing projects, such as the 20,000 unit project in Baghdad that was awarded to Al Maabar. UAE major Arabtec announced in January 2014 that it will be opening an office in Baghdad.

Other UAE firms targeting Iraq's construction sector are NSCC International Limited and Robt Stone who recently formed a joint venture to develop infrastructure projects in Iraq. The joint venture will be focused on engineering, procurement and construction projects, primarily pipeline and plant works, bringing more expertise to the market. Kuwaiti firm Al-Nasriyah was awarded the USD1.35bn 45-year build and operate contract for Al-Diwaniyah International Airport.