OVERVIEW OF THE IRAQ OPPORTUNITY

Doing Business in IraqAmman, 5th June 2003

Achmed Al-ShahrabaniMcKinsey & Company, Inc.

AGENDA

• Overview Iraq

• Economic scenarios for Iraq

• Required investments

AGENDA

• Overview Iraq

• Economic scenarios for Iraq

• Required investments

Total area: 437,000 m2

Limited arable land• Arable land: 11%• Permanent crops: 1%• Desert: 88%

Largest governates• Baghdad (8.0m)• Nineveh (2.1m)• Basra (2.0m)

Varying climate (Baghdad)• Summer temp: 35-50º• Winter temp: 5-15º• Rainfall: 155mm/year

Source: Country Watch, CIA world fact book

Car transport• 39,000 km paved roads• 765,000 privately

registered passenger cars• 266,000 privately

registered trucksAir• Major airports in Baghdad,

Basra and MosulThree major railway routes• Baghdad–Kirkuk–Irbil• Baghdad–Mosul–

Yurubiyah• Baghdad–Maagal–Umm

QasrTelecom• 3% penetration, no mobile

networkUtilities • 250 water treatment

facilities• Power 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: CIA world fact book

100% = 24.2m

Others

Arabs- Shia Muslims

Kurds – Sunni Muslims

4

6212Arabs – Sunni

Muslims

22

ESTIMATE

POPULATION SIZE BY ETHNIC GROUPShia Muslims form Iraq’s ethnic majority

%

Adult literacy at Adult literacy at 54% (vs. 75% in 54% (vs. 75% in

Iran)Iran)

*From 6 to 23 years Source: EIU country profile Iraq 2002

67

50

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

100

110

210

Proven reserves

Unproven potential

Total

4.2

3.1

7.3

Gas Trillion m3, 2001

OilBillion barrels, 2001

OVERVIEW OF IRAQ’S 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

262

98

97

90

110

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 IRAQ’S REAL GDP* - 1980 TO 2002

Over the past decade, Iraq’s real GDP fell by 50%…

USD billion

ESTIMATE

-50%-50%

GDP estimates GDP estimates for 2002 subject for 2002 subject to wide variation to wide variation

(USD 24-60 (USD 24-60 billion)billion)

*Purchasing power parity method, current pricesSource: CIA World Factbook; Country Watch

2002

3.8-4.5

1.0-1.4

1980

ESTIMATE

DEVELOPMENT OF IRAQ’S REAL GDP* PER CAPITA - 1980 TO 2002

… and purchasing power parity on individual level even further

USD thousandsGDP/capita GDP/capita estimates estimates

subject to wide subject to wide variation (USD variation (USD

1.000-2.500)1.000-2.500)

-70%-70%

* Based on a GDP of USD30 billion and a population of 24 millionSource: EIU country profile Iraq

1,184

1,730

1,270

8,730

1,150

Jordan

Iran

Iraq

Saudi Arabia

Syria

*

ESTIMATE

COMPARISON OF GDP PER CAPITA - 2002Iraq’s current GDP per capita is comparable to Syria and Iran

USD thousands

Source: EIU country data

External debt$bn

22.3

8.2

8.2

Iraq

Syria

Jordan

Iran

230-485230-485

1010

9191

113113

% of GPD

60-130 Main causes of uncertainty are• Accrued interest• “Assistance”

funds in Iran-Iraq war

• Claims following Gulf war 1991

ESTIMATE

COMPARISON OF EXTERNAL LIABILITIES - 2001Iraq has significant liabilities and can be considered bankrupt

AGENDA

• Overview Iraq

• Economic scenarios for Iraq

• Recent developments

Source: McKinsey

“Good standard”11• Assumes the non-oil sectors of the Iraqi

economy grows modestly at a CAGR of 3-5% over the next 10 years (overall GDP growth incl. oil 9-11%)

“Best in Class”22

• Assumes the non-oil part of the the Iraqi economy grows strongly at a CAGR of 7-9% over the next 10 years (overall GDP growth incl. oil 11-13%)

“Distinctive”33• Assumes the non-oil sectors of the Iraqi

economy grows aggressively at a CAGR 12-15% over the next 10 years (overall GDP growth incl. oil 13-15%)

ESTIMATEFOR DISCUSSION

THREE DEVELOPMENT SCENARIOSIraq’s In the ‘World Class’ scenario Iraqi GDP per capita could reach 4,000 USD by 2013

Non-oilSectors

• Oil production level 2008

• Oil production level 2013

• 4-5 million barrels per day

• 6-7 million barrels per day

OilSector

++

*) 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 SCENARIOSIn the ‘distinctive’ scenario Iraqi GDP per capita could reach 4,000 USD by 2013

11

“Good Standard”1.8-2.2 2.2-2.6

2003 20132008

1.253-63 73-86

2003 20132008

30

14%6%

11%3%

22

“Best in class”2.0-2.3 2.5-2.9

2003 20132008

1.257-67 83-98

2003 20132008

30

16%8%

12%5%

33

“Distinctive”2.2-2.6 3.1-3.8

2003 20132008

1.263-75 102-126

2003 20132008

30

18%11%

15%8%

AGENDA

• Overview Iraq

• Economic scenarios for Iraq

• Required investments

*Assuming a capital productivity of 0.2Source: McKinsey analysis

GDP 2003 (bn USD)

30

200-300

Investment required*(bn USD)

11

GDP 2013 (bn USD)

70-90

Investment required*(bn USD)

22250-350

GDP 2013 (bn USD)

80-100

Investment required* (bn USD)

33350-500

GDP 2013 bn USD

100-130

ESTIMATE OF REQUIRED INVESTMENTS INTO IRAQ OVER THE NEXT DECADE

To achieve the ‘World Class’ scenario Iraq’s 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 Assuming an average capital productivity of capital productivity of

0.20.2

Source: McKinsey

Oil & gasOil & gas• Reestablishing and increasing oil production

capacity to 6-7 million barrels per day by 2010USD 35-40 USD 35-40

billion billion

Utilities Utilities • Re-construction of basic infrastructure such as

transport facilities, telecommunications and utilities (power capacity currently at 1.800MW compared to 9.500MW pre 1990)

USD 10-15 USD 10-15 billion just for billion just for electricity and electricity and

telecomtelecom

Estimates for rebuilding Iraq vary from Estimates for rebuilding Iraq vary from about $20 billion a year for several about $20 billion a year for several

years to as much as $600 billion over a years to as much as $600 billion over a decade because the scale of decade because the scale of

reconstruction is difficult to estimatereconstruction is difficult to estimate

EducationEducation• Rebuilding and upgrading of primary, secondary

and tertiary educational institutionsUSD 6-12 USD 6-12

billion billion

Health careHealth care • Reestablishing pre 1980 health care facilities and standards

USD 10-20USD 10-20 billion billion

ESTIMATE

Transport Transport infrastructureinfrastructure

• Rebuilding 40,000 km of paved roads, 3 main railway lines, 3 main airports, 2 ports

Several Several billions billions

Housing/offices Housing/offices • …………

Rebuilding Iraq’s basic hard infrastructure will be challenging and will require substantial investments over the next decade

ESTIMATED INVESTMENT RQUIREMENTS

Industrial Industrial infrastructureinfrastructure

• Rebuilding Iraq’s industrial base (petrochemical, building materials, mining, consumer goods, etc.)

??

Source: McKinsey

3. 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 The implemented political and political and

economic economic governance model governance model will be essential for will be essential for

building investor building investor confidenceconfidence

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

1. Build a constitutional state – Implement the key building blocks for

an constitutional state with an independent judicial system

2. Establish an accountable civil service– Build the foundation for an efficient,

effective and accountable administration

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 Iraq’s 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 regionFOR DISCUSSION

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