Project Iraq put in jeopardy as Western companies wait for the smoke to clear

The country was supposed to provide rich pickings, with billions of dollars' worth of contracts up for grabs. But as kidnappings and killings undermine security still further, Tim Webb and Clayton Hirst ask if the reconstruction effort is about to unravel

Businessmen representing the largest energy and construction companies in the world will gather next weekend at a secret location in central London. Their mission: to put pen to paper for billions of dollars of contracts for the rebuilding of Iraq. The event was sold out over a month ago, say the organisers, the Arab-British Chambers of Commerce. Sponsors - including Shell, Volvo, ChevronTexaco, Pfizer and Kodak - have not been put off by the recent upsurge in violence in Iraq, they insist.

Businessmen representing the largest energy and construction companies in the world will gather next weekend at a secret location in central London. Their mission: to put pen to paper for billions of dollars of contracts for the rebuilding of Iraq. The event was sold out over a month ago, say the organisers, the Arab-British Chambers of Commerce. Sponsors - including Shell, Volvo, ChevronTexaco, Pfizer and Kodak - have not been put off by the recent upsurge in violence in Iraq, they insist.

Delegates will include Iraqi ministers and leading families owning the biggest businesses in the country.

Some of the companies attending had declined to go to a conference organised by the Coalition Provisional Authority (CPA) for the oil industry, scheduled for today in the southern Iraqi city of Basra. With 40 foreigners, mostly civilians, being taken hostage by rebels last week, you can't blame them. The conference has now been cancelled.

There weren't many takers either for the ambitiously named Baghdad Expo, due to take place at the end of the month. It has been moved to the northern town of Sulaymania. One Iraqi official explains: "It is much safer there. It is in a Kurdish area."

Relying on the Kurds for protection was not part of the plan when American and British forces invaded Iraq this time last year. The recent spate of kidnappings of foreign civilian contractors working in Iraq marks a worrying new tactic against the coalition. Germany and France issued official advice to their citizens last week to leave Iraq. And Russia's largest contractor in the country, the power station builder Technopromexport, announced it was pulling out its 370 employees after eight Russia workers were kidnapped in Baghdad.

So is the reconstruction of Iraq about to unravel?

Most firms that are well established in Iraq are staying put - for now. They refuse to reveal exactly how many staff they have working in the country, but it is thought there are around 1,000 Britons, excluding security staff. Of the 50 UK companies there, Amec has the largest share of the reconstruction work. With its US partner, Fluor, it won a $1.1bn (£617m) deal last month to help restore Iraq's water system. But it has yet to receive the detailed task orders on its contract from the CPA. When it does, in the next few weeks, the company will have to decide whether to risk flying out more staff to start work on the project, or delay it. Other British companies, such as the engineering groups Halcrow and Foster Wheeler, which also have staff in Iraq, refuse to discuss their plans in the light of the worsening security problems.

Nick Day, the chief operating officer of Diligence Information & Security (DI&S), a security firm, says: "Commercial contractors are considering their positions in Iraq. They are either partially withdrawing their expatriates or keeping a low profile to see how the situation pans out." One thing is certain; security firms are not short of work. DI&S has added 20 people to its 350 staff in Iraq in the last few days.

One chief executive of a big UK company working in Iraq underlines the dilemmas faced by many companies already on the ground: "When things are going wrong, the first thing you are told is to stay where you are. You get hurt when you move." But his company is lucky because it is attached to the US military. "We took a decision early on that we would only do work where our people are protected by the military," he says. "I wake up each morning and thank God that this is the case, as we are in some pretty hairy places."

Companies that have yet to go into Iraq are weighing their options. Colin Adams, the chairman of the British Consultants and Construction Bureau (BCCB), says: "The companies which are well established have not shown any indication of pulling out. The more difficult decisions must be made for those who are thinking of going into Iraq."

The Foreign Office is advising UK firms that have won reconstruction work to postpone their travel plans. "We advise against all but the most essential travel to Iraq," is its official line, updated on Wednesday. A diplomat at the British Office in Baghdad confirms that this guidance includes companies that have recently won contracts. "They should wait until the situation calms down," he says.

But some British companies have complained about a lack of support from the British Government. One security expert says: "The Department of Trade and Industry has no idea what is happening on the ground. We get a lot more support from the US."

Brian Wilson, the Prime Minister's special envoy in Iraq, who lobbied on behalf of British companies for a slice of the reconstruction work, says: "The Foreign Office issues the advice and it is up to the companies to make their own assessments."

The Foreign Office says that companies already in the country should contact the Iraq Unit at UK Trade and Investment (UKTI) for guidance. But a UKTI spokesman says: "It is for the individual companies to decide."

Companies fear the Government's message is stark: you're on your own.

Under these circumstances, it is not surprising that many companies decided some time ago that Iraq was not worth the risk. The chief executive of WS Atkins, Keith Clarke, has said that because he would not want to send his son or daughter to the country, he could not justify sending any employees there. The engineering group does not have happy memories of Iraq anyway; its employees were in Kuwait shortly before it was invaded in 1990.

Balfour Beatty decided last summer it was too dangerous to work in Iraq. A spokesman for the construction group says: "We don't regret the decision."

Like the war in Iraq, the reconstruction of the country is proving to be more complex than the planners had envisaged. A handful of American officials in Washington dreamed up the reconstruction project before the first US soldier had even set foot on Iraqi soil. Everything in the country - its infrastructure, schools, hospitals, even its political system - was to be rebuilt, initially under the auspices of the American overseas development agency USAaid. The first wave of contracts, worth $2bn, all went to US firms, with no competitive tendering. Companies with close links to the Bush administration, such as Halliburton, the oil services company formerly run by vice-president Dick Cheney, cleaned up.

Responding to criticism that the process was not transparent enough, retired rear admiral David Nash, heading the US reconstruction effort, promised in November to put $18bn of contracts for the second stage of reconstruction out to open and competitive tender. But companies from countries that had opposed the war, such as France and Germany, were barred from bidding, prompting further criticism that the US was seeking to profit from the war.

Admiral Nash said at the time that under the "accelerated" process, the 24 new contracts would be awarded by 1 February. Procurement processes for such large contracts usually take six months to complete. "To me, it's not impossible," he said. "It does make people wonder. But I think we're okay."

No one believed him, least of all companies that knew the situation on the ground. Within weeks, Admiral Nash had abandoned the unrealistic time- table, and since then, only a handful of contracts have been awarded in the second phase.

The World Bank has also got in on the act, belatedly. Late last year, it identified $55bn worth of work needed to rebuild the country over the next four years. Of that, the international community pledged $33bn of funding at the Madrid donors' conference in October. But ominously, the World Bank has noted, that in its experience, "constraints to reconstruction are not often due to a lack of funds".

"While the figures in the assessment reflect the best estimates of the likely needs for the immediate and medium term, the actual disbursement - that is, the expenditure - of funds is much harder to predict, because it depends on the security situation, the capacity of Iraqi institutions to plan and imple- ment projects, and the state of infrastructure and energy services."

The World Bank is reluctant to send officials to Iraq while the security situation in the country is unstable, causing further delays.

Oil was supposed to bankroll the reconstruction effort but the expected bonanza has yet to materialise. Iraqi oil production is approaching its pre-war levels of 2.5 million barrels per day, thanks to an injection of $1bn of US money. However, Iraq cannot exploit the second-largest known reserves in the world without the investment of Western oil firms. These companies are not prepared to pay the billions of dollars needed upfront until they are confident that the long-term contracts they sign with the current administration won't be ripped up by a new Iraqi government six months later. A spokesman for French oil company Total says: "Until there is a legitimate government, there is nothing to negotiate. We need long-term contracts to recoup the very large initial outlay. Also we need security and a proper infrastructure in place before we invest." BP echoes these sentiments: "We are waiting for a stable government to be established. There is too much risk otherwise."

The Bush administration is scheduled to hand over power to an Iraqi administration on 30 June, but no one is quite sure what form this will take. It will not be democratically elected, and it is unlikely to have the popular backing of the Iraqi people. Whatever the Bush government may say, the oil industry is not impressed and will carry on waiting, depriving Iraq of more revenue to fund further reconstruction.

Many other companies are also sitting on the fence. Serco has just completed work on a contract to manage airport services in Baghdad and Basra. A spokesman for the British group says: "We will monitor the security situation before bidding [for any more contracts]." Mowlem, which, in partnership with America's Kellogg Brown & Root, missed out on winning three water deals earlier this year, is also keeping tabs on security. A spokeswoman says that a full risk assessment will be carried out before bidding for new contracts.

For those companies waiting to see if the security situation stabilises, the outlook, in the short term at least, does not look good. Mr Day from DI&S says: "The US is poised to take action in the south, and there are concerns over the repercussions from that. There is talk of the trouble getting worse at the end of April as people try to destabilise the country before the next month's handover."

For companies that have taken the plunge, insurance is becoming more expensive, making Iraq an even less attractive prospect. Brokers in London say that in the past 10 days, premiums have doubled. Anne Williams, a director at insurance broker Heath Lambert, quotes a premium of 6 per cent to insure higher-risk professions such as journalists or security guards. With the cover paying out up to $250,000 in case of death or injury (for more senior staff, the maximum can rise to $500,000), such a policy would cost $15,000. This makes it 12 times more expensive than, for example, the average policy in Afghanistan (where premiums are typically 0.5 per cent) or 24 times more expensive than in Saudi Arabia (0.25 per cent). But despite the higher prices, demand is still there. "There is a lot of business to chase," says Ms Williams.

Companies have asked the British Government for help with the insurance. But the request has been refused. Mr Wilson says: "The companies have to deal with their own insurers."

A spokesman for UKTI adds: "If the companies want to work in Iraq then that is something that they have to sort out. Insurance is an issue for them; there is nothing we can do about it."

Mr Adams from the BCCB is pressing USAID and the World Bank to separate the cost of security and insurance from the bidding price. "We don't want companies trying to undercut each other on something as important as security. The cost should be separate and reimbursed by the customer."

Since the end of the war, Iraq has constantly been dangerous. Despite the recent escalation of violence and apparent targeting of civilian contractors, companies already in the country with contracts to complete are toughing it out for the moment. But the reconstruction effort cannot go beyond the initial stage - dredging ports, repairing the electricity grid - while contractors are being kidnapped and murdered. The oil industry and the banks will not go in under these circumstances. Meanwhile, the 30 June handover of power will create more uncertainty. Mr Day says: "Companies who were on the verge of going into Iraq will now want to see what repercussions there are from the handover; I can't see them moving before the autumn."

With US presidential elections in November, the reconstruction of Iraq is not going to President Bush's schedule.

AND YOU THINK IT'S RISKY IN BAGHDAD...

Country Overall risk rating (where 5 is highest, 0 lowest)

Iraq 4.75

Outbreaks of factional fighting, anti-US protests and resistance attacks create high operational risks.

Afghanistan 4.75

Factional and tribal conflicts are frequent and often violent. Taliban and al-Qa'ida fighters attack the US-led coalition, Afghan troops and civilians.

Burundi 4.50

Violent crime is an acute threat to foreigners, while there have been massacres of civilians by both government and rebel forces.

Haiti 4.50

Rising crime, especially in the capital, Port-au-Prince. Drug trafficking poses serious problems.

Liberia 4.50

Most unstable and investment-averse country in the West African region.

Crime and internal political repression rising. Vulnerable to ethnic unrest and cross-border fighting

Palestinian Authority 4.50

Terrorism and political violence are frequent occurrences.

Somalia 4.50

Parts still controlled by armed, clan-based factions and militia groups financed by demanding money from local businesses and international humanitarian agencies.

Central African Republic 4.25

High risk of highway robbery in some areas. Government run by military junta.

Ivory Coast 4.25

Violent crime rising in cities, particularly Abidjan. Much of the north is under uneven jurisdiction of the New Forces rebel group.

Democratic Republic of Congo 4.25

Crime and banditry on rise.

Source: World Markets Research Centre.