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Iraq Reconstruction Spells Opportunity

Small businesses are lining up to win contracts for the rebuilding of Iraq. Have you taken a number yet?

Though the war in Iraq is still raging in parts of the country, the battle among companies to rebuild the shattered nation has already begun. And while the war riveted the world over a span of several weeks, the rebuilding will take much longer, and cost much more, than the conflict itself. At the same time, since the reconstruction will be an extremely costly and time-consuming affair, it could prove a boon to American companies that secure contracts to rebuild Iraq.

Although the United States has contributed in recent years to the reconstruction of several other shattered countries--Afghanistan, Cambodia and East Timor, for example--the Iraq reconstruction probably will dwarf these former efforts. The Bush administration has announced that rebuilding Afghanistan will take 10 years and roughly $20 billion. In contrast, a study by the Council on Foreign Relations, a leading U.S. think tank, estimates it'll cost nearly $100 billion to rebuild Iraq, while the Center for Strategic and Budgetary Assessments, a research organization, has calculated that the nonmilitary rebuilding costs could near $500 billion. "This is going to be an effort that doesn't really compare to any recent nation-building," says Steve Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments in Washington, DC. "You'd have to go back to the Marshall Plan [the post-WWII reconstruction of Europe] to find a comparable example. ...The Bush administration has very ambitious goals for Iraq, which means an expensive reconstruction."

This rebuilding will result in contracts for companies in a range of industries. Most likely, the U.S. and a few other nations will put money into a pool of funds to be used for reconstructing Iraq. Then, while America sets up an interim administration to run Iraq, headed by a leading U.S. official, a U.S. government agency like the Pentagon or the U.S. Agency for International Development (USAID) probably will launch a bidding process to select companies that can fulfill specific rebuilding tasks.

What's more, though some foreign nations may complain about being excluded, the Bush administration seems likely to keep most rebuilding contracts for U.S. firms, in part to punish other countries that opposed the war in Iraq. Working with American firms also is simply easier for an agency like the Pentagon or USAID, Kosiak says, because it takes less time for U.S. companies to win security clearances needed to take on federal contracts.

These contracts could be a gold mine. As several newspapers have reported, in the Iraq rebuilding, contracts will be paid in a manner known as "cost plus fixed fee." In other words, the U.S. government will establish how much a project will cost and promise a contractor that it will pay them this cost plus a fixed profit--normally 8 to 10 percent. In so doing, the government basically guarantees contractors make money.

And once American firms win the initial contracts in Iraq, they would have a leg up on foreign companies in establishing long-term relationships with the new Iraqi government and with the Iraqi people, who are richer and better-educated than their counterparts in Afghanistan or Cambodia. (Iraq has the world's second-largest proven oil reserves, after Saudi Arabia.) "Companies that position themselves to win contracts could put themselves in place to win billions of dollars in more future deals from a free Iraqi government," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

What's the Current Climate?
Despite the war in Iraq and a faltering economy, business owners remain fairly optimistic about the hopes for a recovery, according to an survey conducted the week of April 7. More than half of the 523 respondents indicated that they had no plans to change their business investment strategy as a result of the war. In addition, 52 percent said their customers had not scaled back on their purchases since the start of the year, and a full 68 percent said they think conditions for their businesses will be better 12 months from now. We may just see a recovery yet. --Karen E. Spaeder
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