April 12 2010
War, neglect and over three decades of mismanagement have left Iraq with an electric power infrastructure that barely meets half of its total demand for electricity. Thus, an aggressive plan to address this problem within the next five years has been created. It involves re-tooling nearly every aspect of the national grid, along with power generation and delivery. As a result, international companies properly positioned to provide such services and products will be offered a wide range of opportunities within the electricity sector.
During the 1991 Gulf War, the electricity system suffered severe damage and was not properly constituted. Before the 2003 conflict, the available capacity was approximately 4,000 megawatts (MW). Although the power system was not significantly affected by the 2003 conflict, its capacity was further reduced to approximately 3,300MW by a combination of further breakdowns and interruptions of major maintenance cycles.(1)
Created in 2003, the Ministry of Electricity became responsible for both policymaking and the electricity supply throughout the country. Despite the ministry's rebuilding efforts, electricity production has been unable to match the ever-increasing demand. The ministry reports that the current peak demand is approximately 10,000MW, yet demand may be even higher than reported by the Iraq government as a result of illegal connections which dominate Iraqi towns and cities and a lack of metering.(2)
Experts estimate that demand will continue to grow at a rate of 15% per year. Demand for electricity has been stimulated by a growing economy and a surge in consumer purchases of appliances and electronics. In addition, electricity is subsidized in Iraq, which leads to increased demand, irrespective of market forces.(3)
Some progress has been made through the implementation of major projects by the United Nations Development Programme and the US Agency for International Development. In January 2010 the special inspector general of Iraq reconstruction reported that electricity supply to the national grid averaged approximately 5,952MW, a 19% increase on the same quarter in 2008.
To address the discrepancy between electricity demand and supply, the Ministry of Electricity adopted the electricity master plan, which was discussed in the National Development Strategy for 2007 to 2010. The primary goal of the master plan is to increase generation capacity to 21,000MW in order to provide reliable electricity across Iraq, with demand expected to double by 2015. The ministry estimates that the master plan has an estimated investment requirement of $27 billion. To facilitate execution of this plan, the government of Iraq has reformed several procurement regulations and contracting provisions. The government has also strived to improve the largest barriers to entry into the Iraqi market - namely, the issues of corruption(4) and security.(5)
The first company to enter the power generation market was General Electric. General Electric has been supporting Iraqi infrastructure needs in power generation, oil and gas, water processing, aviation and healthcare since 2003. As an integral part of its master plan the Ministry of Electricity has entered a $3-billion contract with General Electric to provide 56 multi-fuel gas turbines capable of supplying 7,000MW of electricity. Each 1,000MW of generating capacity is expected to provide power for approximately 400,000 homes. The government plans to install the units at 10 key sites around the country to provide needed support for the electricity grid. The ministry is also planning to spend $150 million on the rehabilitation of existing power plants.
The additional generating capacity to be created by the General Electric contract will create many other supporting projects.(6) In terms of transmission, the Ministry of Electricity will begin by spending $60 million on rehabilitation of existing transition networks. Then, 11 new 400 kilovolt (kV) stations and 71 132kV transition network stations are expected to be constructed for approximately $700 million. The ministry estimates that 1,200 kilometres (km) of 400kV and 2,000km of 132kv transition lines must be built to support the new stations. With respect to distribution, the ministry plans to add 7,900km of lines and cables and build 136 33/11kV stations.
The recent global recession has raised questions as to whether the government will be able to fund this master plan. The new 2010 budget of $72 billion is expected to contain approximately $20 billion of deficit spending. Up from the $1.08 billion received in 2009, the Ministry of Electricity is expected to receive approximately $3.5 billion for capital investments.(7) To address concerns about funding, the government has continued to foster relationships with international aid and financing organizations. Through the US Agency for International Development, the US government will continue in the rebuilding effort. In anticipation of revenues falling short, Iraq and the International Monetary Fund came to an agreement on a new three-year, $3.8-billion stand-by arrangement.(8) Among international contributors, the World Bank has committed $3 billion to $5 billion for reconstruction over a five-year period, and smaller commitments have come from Japan, the European Union, the United Kingdom and Spain.
The Ministry of Electricity has also stated that the private sector should be the main source of new investment. Iraq intends to allow independent power projects to reform on build-own-transfer and build-own-operate bases. Iraq also intends to reform the electricity tariff system to make these projects more appealing. The government has even gone as far as amending the investment law. This new provision could encourage greater foreign investment in real estate and construction by allowing investors to acquire land-use rights, as well as ownership rights under limited circumstances.(9)
Companies interested in bidding on a tender must be registered with the Ministry of Trade. In addition, companies interested in establishing an office in Iraq or bidding on a government tender are required to register as a foreign business in order to do business in Iraq.(10) Tenders for government contracts are offered by national government ministries and provincial governments. Although there is little consistency in how tenders are offered, written or announced, they are generally announced on Iraqi government websites. The US Department of Commerce's Iraq Investment and Reconstruction Taskforce offers the 'Iraq Alert' service for companies interested in receiving notice of government of Iraq tenders, as well as tenders from the US government and international organizations in Iraq. However, without local representation, a US company is unlikely to be in a position to compete successfully for a government of Iraq tender offering. This is because winning a government tender in Iraq is typically a tedious and bureaucratic process that requires the continuous attention of a local representative.
(1) United Nations/World Bank, Joint Iraq Needs Assessment (Baghdad, Iraq: October 2003).
(2) The US government commissioned an independent study and estimated demand to be upwards of 13,000MW.
(3) Department of Defence, Measuring Stability and Security in Iraq, April 11 2009, p 18.
(4) Iraq is a signatory to the United Nations Convention Charter Against Corruption and is just starting the process of evaluating changes that are required to come into compliance.
(5) November 2009 had the fewest Iraqi civilian casualties since 2003 and December was the first month since the invasion that no US service members died in combat in Iraq.
(6) National Development Strategy for 2007 to 2010.
(7) US Embassy-Baghdad, US Treasury Attaché, response to special inspector general for Iraq reconstruction data call, January 17 2010.
(8) International Monetary Fund stand-by arrangements provide countries with financing to overcome balance of payment problems and to help to cushion the impact of adjustment.
(9) Economist Intelligence Unit, Country Report: Iraq, December 2009, p 12.
(10) Requirement also covers US companies working on US government contracts.
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.