A booty for the barons of Baghdad

The streets may be troubled, write Adrian Gatton and Clayton Hirst, but Western dollars are about to rain down on an elite group of secretive Iraqi families. Meanwhile, as business booms for a British intelligence firm, financial speculators are licking their wounds

The television images portray a bombed-out country with its inhabitants living in crumbling houses close to the poverty line. But away from the allied forces' patrols and the buildings riddled with bullet holes, a small but powerful group of families is thriving in Iraq. With business contacts throughout the Gulf and the Middle East and extending into Europe, Iraq has developed its own powerful set of oligarchs. The Al-Bunnias, Al- Khudairys and Kubbas (the latter from Najaf in Southern Iraq) have become the region's own Rockefellers, Gettys and Fords.

The television images portray a bombed-out country with its inhabitants living in crumbling houses close to the poverty line. But away from the allied forces' patrols and the buildings riddled with bullet holes, a small but powerful group of families is thriving in Iraq. With business contacts throughout the Gulf and the Middle East and extending into Europe, Iraq has developed its own powerful set of oligarchs. The Al-Bunnias, Al- Khudairys and Kubbas have become the region's own Rockefellers, Gettys and Fords.

Like their American counterparts, these Iraqi dynasties are built on property, construction, technology and manufacturing and are over a century old. But the fortunes of this wealthy elite could be transformed with the billions of dollars that are set to flood into Iraq to patch up the war-torn country.

Western firms such as Halliburton, Bechtel and Amec lodged bids on Thursday for the $14bn (£7.6bn) worth of contracts being handed out though the Iraq Infrastructure Reconstruction Office. The companies have been privately told that the successful bidders will be the ones that can complete the works quickly - "to win the hearts of the Iraqis". To do this, the firms will have to call on the powerful Iraqi business dynasties, which have the contacts and know the intricacies of the country's sometimes-erratic business practices.

Western firms will be reaching for a copy of a tome by academic Hanna Batuta called The Old Social Classes and the Revolutionary Movement of Iraq, published in America in 1978. According to one Iraqi lawyer, who asked to remain anonymous, if today you are wealthy in Iraq but can't be found in the index of this book, then you must have got rich because of Saddam Hussein and his Baath party.

Identifying a family not tainted by the former dictator's regime is not easy. Some Iraqis believe that, come June, when power transfers to Iraq, some of the families who collaborated with the regime could have their assets seized. The incoming government is expected to enact existing anti-corruption legislation and empower investigators to probe the sources of the wealth of the big families. Others predict that it will be difficult for the government to gather hard evidence of collaboration. The key is to separate economic from political power, but so far, that has not happened in Iraq. "We're focusing on economic de-Baathification," says Zaab Sethna a senior adviser to the Iraqi National Congress.

According to a report by the Center for International Private Enterprise in the US, Iraq has 12 powerful family groups. Some are secretive and little is known of their interests. Others have sprawling empires that spill into the West.

The Al-Bunnia family is one of the oldest and arguably one of the most powerful in Iraq. The Bunnia industrial group is headed by Abdul Wahab Mahmoud al-Bunnia who is grooming his son, Khalil, to take over. Founded in 1910, the business now has 4,000 staff and over 40 subsidiaries involved in construction, food, banking, insurance, textiles and hotels. Like most successful Iraqi families, it is developing links with Western companies. It owns a Pepsi bottling factory, a BMW dealership and also claims to have agreements with IBM, Hyundai and Epson.

Some members of the Al-Bunnia family are known to lavish their riches on luxury goods. Khalil recently boasted he had a collection of "the most expensive cars in the world".

Isam al-Khafaji, a former member of the Iraqi reconstruction council, says the family worked beside the Saddam regime but didn't run the dictator's front companies.

Rivalling Al-Bunnia is the Al-Khudairy dynasty. Run by Adnan al-Khudairy, the family controls one of the largest construction companies in the region and also owns the country's largest drugs firm, Dhofar. Employing 5,000, its tentacles extend to the West, notably a joint venture with UK oil company Wood Group and US construction firm Shaw Group. The family has been critical of the Coalition. At last year's World Economic Forum, Faisal al-Khudairy, Dhofar's chairman, accused it of "rehiring tainted government officials".

The powerful Iraqi business elite is desperate to avoid any whiff of controversy that may come from the previous regime. The Kubba family is made up of hard-nosed business people making money out of IT, marketing, telecoms, engineering and construction. It also owns a soft drinks firm, Kufa Cola, run by Raed Najah Kubba, which is thought to have discussed a joint venture with America's Coca-Cola.

The Kubba website makes no secret of the desire to cash in on the confusion after the fall of the Baath regime: The company is "well-positioned to help international businesses navigate through the myriad of commercial and political complexities facing the Iraqi market today".

The Munir Sukhtian family is not technically Iraqi but over the past few years it has emerged as a force in the region. The family business dates back to 1933 when it set up as a pharmacy in Palestine. Today, the company is run by the three sons of the eponymous founder and much of its business is in Jordan, spanning telecoms, chemicals, pharmaceuticals and manufacturing. It is said to be becoming a powerful player in the reconstruction of Iraq.

The other Iraqi families, such as Shanshal, Al-Dulaimi, and Al-Kharbeet, have eschewed publicity and less is known about their dealings. However, their names are likely to be looked up by the gaggle of Western companies hoping for a slice of the reconstruction programme.

US companies, mainly Halliburton and Bechtel, have won the lion's share of the work so far. UK companies, including Vodafone, De La Rue, Standard Chartered and Serco, have been relegated to the secondary contracts. This has led to claims that the US, which is in charge of the reconstruction, has favoured its own companies. Brian Wilson, Tony Blair's special envoy on reconstruction, says: "It is an un-level playing field. The Americans have taken the view that if it is US tax dollars paying for the work then American companies should go to the front of the queue. There is no point in arguing with that, but there is substantial scope this time around for British companies to get some of the work."

Amec, in a joint venture with Fluor of the US, has bid for contracts worth $5bn. And Mowlem, working with Halliburton subsidiary Kellogg Brown & Root, has placed bids for $1.5bn worth of contracts.

Mr Wilson says: "There is no doubt the Iraqis want British companies to be more involved because they are not American. The Iraqis are more comfortable working with the British because they have more of a cultural, historic and educational affinity."

If he's right then the likes of Amec had better dig out a copy of The Old Social Classes.

The spy who brings firms in from the cold

Nick Day's life is something of a boy's own fantasy. Spurred on by the Falklands War and dire A-Level results, he joined the Marines at the age of 18 before becoming an officer in the Special Boat Service, the maritime equivalent of the SAS. Following time in Iraq, Northern Ireland and Bosnia (where he gathered intelligence and "chatted up Norwegian nurses"), he became as spy, joining MI5 and specialising in Middle Eastern terrorist groups. And all that before he hit his mid-30s.

Four years ago, however, Mr Day quit to set up intelligence and security firm Diligence with ex-CIA agent Mike Baker. The firm now has around 200 employees, offices in London, America, Geneva and the Middle East, and a turnover of £5m a year.

In association with Kuwaiti partner the Al-Mal Investment Company, the firm works for blue chips, media agencies and non-governmental organisations either already in Iraq or about to move in. Services include vetting local employees and partners, due diligence on potential investments, daily intelligence briefs, protecting compounds and payrolls, and providing bodyguards. Fees are based on the level of risk involved.

At the moment, security threats come from insurgents and old-fashioned banditry. Mr Day believes terrorism will fade, leaving the bandits to hone their skills in the same way sophisticated organised crime emerged in developing markets such as Russia.

In the meantime, there are two ways to protect businesses. "You either drive round in heavily armoured vehicles and have lots of weapons or you become discreet, using Iraqis to guard you and local vehicles," says Mr Day. The ones who become targets are those who drive ostentatious "big white Jeeps" but without armoured capability or enough weapons.

In common with many Western operations in Iraq, Diligence has links to the US. The heavyweight Republican lobbying firm Barbour Griffith & Rogers (BGR) has invested in the business, though Mr Day insists it was a "relatively small amount".

Diligence also works in association with New Bridge Strategies, a US firm with links to BGR that was set up to help companies secure Iraqi contracts.

Clients are understood to include the American governmental agency USAid and a number of companies associated with Halliburton, Vice-President Dick Cheney's former firm, which recently fired two employees for taking $6m in kickbacks over Iraqi contracts.

Mr Day, however, remains unfazed. "There definitely has been corruption in Iraq, but because the spotlight on Iraqi contracts has been so intense, you wouldn't believe the lengths you have to go to."

And while sceptical about the claims of weapons of mass destruction, he believes war was a means to a viable end. "The people are glad to be rid of Saddam Hussein and believe this offers the best chance of a future. They are happy things have changed."

Furthermore, demand from the corporate world for Diligence's services is not going away. "We want to take on the world," Mr Day says. "We will go where there's a market for our services. People just feel uncomfortable in emerging markets."

Abigail Townsend

Debt traders find profit is a mirage

There's an estimated $120bn of it, no one knows how much it is worth and not a penny has been repaid for 15 years. Yet there is a lot of interest in Iraqi debt.

"The number of enquiries we have had and the number of people who want to know what is going on have substantially increased. There has been an uptick in activity," says Peter Bartlett, the managing director of specialist illiquid debt trader Exotix. "It's gone from one trade every two to three weeks to one trade every week."

Speculators became quite excited about Iraqi debt as Coalition forces prepared to invade last year. The country's external borrowings have been frozen for over 12 years as a result of the sanctions imposed during and after the first Gulf War. But Iraq had not paid back anything on its borrowings since 1988.

The hope that a new US-backed administration might start making repayments on the billions of sovereign debt, trade finance and company loans sent prices rising from about eight cents in the dollar to 30¢ by the time Baghdad fell. Interest from specialist distressed debt investors was boosted by others who realised that this was the only practical way to speculate on the recovery in Iraq's fortunes.

Since then, reality has set in.

For a start, lots of the debt may not be recoverable because the documentation has been lost or the borrower no longer exists. Much of it is guaranteed by the Iraqi state bank, Rafidain, which is in essence bankrupt. The UK branch was placed in provisional liquidation last year, though this might be a boon as it clarifies the legal status of its bank guarantees.

Then there is the question of debt forgiveness. The Paris Club of creditor countries, owed an estimated $21bn plus interest, has been discussing how much of it might be written off. A decision should set a precedent for how much commercial debtors would accept - though this has not worked with a similar situation to do with Serbia. There, the Paris Club deal was seen as too generous to the Balkan state and the commercial banks are still wrangling.

A third factor is the creation of a government supported by the Iraqi people, which can make decisions about whether it will use much, if any, of the country's potentially massive oil revenues to pay off this ancient debt.

Experts in the sector counsel caution. "We could be years away from gaining a clear picture," says Kay Haigh, the head of emerging markets trading at Deutsche Bank.

Jason Nissé