Iraq Reconstruction Spells Opportunity
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 Entrepreneur.com 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|
Subcontracting Is the Key
In some areas, large companies will dominate the bidding for contracts to rebuild Iraq. "When you're a small company, it might seem like a daunting risk to handle a large project on another continent, in a place that's probably not going to be that secure for a long time," Baxter says.
Indeed, large corporations have already won several big reconstruction contracts. Seattle-based Stevedoring Services of America, a shipping and marine cargo company, has landed a $4.8 million deal from the U.S. government to upgrade Iraq's deep-water port of Umm Qasr, which was damaged by fighting early in the war and is a vital sea lifeline for Iraq. And USAID has asked six major construction conglomerates--Bechtel, Fluor, Halliburton, Louis Berger Group, Parsons Corp and Washington Group--to compete for the first major infrastructure reconstruction contract.
But small entrepreneurs also can compete for and win some of these contracts. "Where the opportunity lies for smaller companies is in the subcontracts of the bigger contracts, where you only have to handle a small aspect and don't have to take the huge risks of sending tons of employees to Iraq," says Baxter. "A big company like a Bechtel or a Halliburton gets a big infrastructure rebuilding contract and then hires smaller companies to handles certain aspects of the larger deal." Indeed, Halliburton last month was given an open-ended contract by the U.S. government to extinguish oil well fires in southern Iraq and to rebuild some of southern Iraq's oil infrastructure. After receiving the contract, Halliburton immediately hired small Texas-based subcontractors Boots & Coots Well Control Inc. and Wild Well Control Inc. to take charge of some of the fire-fighting.
In addition to repairing Iraq's oil infrastructure, some rebuilding tasks that could involve small companies include fixing and maintaining the deep-water port of Umm Qasr and rebuilding more than 2,000 miles of Iraq's highways and secondary roads, especially in areas south of Baghdad that saw heavy fighting. Several U.S. officials also have mentioned the need for purifying water; and one small U.S. company, Moving Water Industries of Deerfield Beach, Florida, has already begun jockeying to get water purification subcontracts. Moving Water Industries, a water-pump manufacturer, hopes to land a contract supplying drinking water to Iraqis and restoring southern Iraq's badly damaged--but potentially fertile--marsh wetlands, which were drained by Saddam during the 1990s in an attempt to punish dissident southerners after the first Gulf War.
Other American officials have highlighted the need to hand out contracts to companies that can provide security for other businesses operating in Iraq. There will be a need for private military companies (PMCs) to provide security and handle similar tasks in Iraq, says Peter W. Singer, an expert on PMCs at the Brookings Institution in Washington, DC. Most of these PMCs are relatively small firms.
Small service firms--finance firms, consulting groups and the like--are also optimistic about their chances for Iraq subcontracts. Ellerbe Becket, a Minneapolis-based architecture and design firm, believes it can win subcontracts to build hospitals, schools and even sports stadiums in Iraq. After all, USAID has already stated that the U.S. will help rebuild at least 6,000 school buildings in Iraq.
Charlotte, North Carolina-based engineering firm Freeman White, which has experience working with hospitals and health-care firms, apparently shares Ellerbe Becket's belief--Freeman White reportedly is meeting with the Department of Defense to discuss rebuilding Iraq's medical infrastructure. And many small and midsized consulting groups in Washington, DC, think they can win subcontracts to help teach the first free generation of Iraqi professionals how to utilize the new medical, financial, energy and educational infrastructure that will be built for them. In fact, the U.S. has already announced that it will give a contract for emergency relief and near-term rehabilitation efforts in Iraq to International Resources Group, a Washington, DC, consulting firm.
To win these subcontracts, entrepreneurs will need to demonstrate several skills, Iraq experts say. Having an established relationship with the Pentagon or USAID, as well as some experience working in an unstable environment, will be vital, says Baxter. Experience working in dangerous places will be particularly important for small companies that plan to compete for oil and gas subcontracts, since the petroleum industry could be a target of Iraqi militants.
International Resources Group, for example, has worked in many other unstable environments, while Boots & Coots and Wild Well have previous experience putting out oil well fires in dangerous locales. To lessen the dangers involved in working overseas, in a potentially unstable environment, small companies in one industry may want to form a consortium and bid for subcontracts together, thereby sharing both profits and risks.
Having a regional presence in place can help as well. "It's important to already have some presence in the Middle East, so the people handing out the contracts realize that you understand and can adapt to foreign cultures," says Ellerbe Becket director of communications Stuart Smith. (The company's CEO, Rick Lincicome, is in the Middle East presently and was unavailable for interview.) "We have two small offices, in Cairo and Dubai, so we can show we comprehend the region."
Smith also notes that having an established name, even in a small niche industry, helps in winning international contracts. "When you compete for an international contract, it helps if you have some sort of global prestige, even if it's limited to one field--we're not big, but we're well-known globally for building health-care facilities," Smith says. "There are a lot of locally trained professionals you can draw on, and they prefer to work with a company that has a global reputation."
|Although the U.S. government
has not yet completely established how it will handle the post-war
reconstruction of Iraq, which agency will take charge of the
reconstruction or how most contracts will be bid upon,
entrepreneurs interested in obtaining more information about the
process should stay informed by repeatedly checking the government
And while the plan for reconstruction has not been fully formed, the U.S. Agency for International Development has issued nine solicitations to date for reconstruction activities in Iraq. Information about these solicitations is available at http://www.usaid.gov/iraq/activities.html.
Several of these contracts have already been won, but some are still open, and entrepreneurs can bid for them. Plus, by constantly checking on the progress of these contracts, entrepreneurs can find out if larger companies have won the bids and will then know who to contact to try to win subcontracts.
Joshua Kurlantzick is a writer in Washington, DC, and a frequent contributor to Entrepreneur.com.