Organisations looking to invest in developing countries need to look beyond generic labels such as ‘BRIC’, and the associations made with geographical regions, and should evaluate countries on an individual basis to discover their true value, according to Richard Fenning, CEO, Control Risks Group.

Speaking at the Economist’s Emerging Markets Summit in London, Fenning said that a term that lumps multiple countries into a single group “supposes a kind of homogeneous nature” is not an accurate assessment of the reality on the ground.

But even when investors look past a country’s regional position, the ‘country brand’ – perceptions of a country fuelled by external commentators such as the media, analysts, international bodies – can distort a true analysis of the risks involved.

“We have to stop looking at the world in terms of these various categories: developing economies, BRIC economies and the next level down, and look at them seriously as independent.” Fenning said.

For those organisations willing to take a ground up approach and understand the local climate for themselves, Fenning reasons, opportunities do exist.

Iraq as the ‘phenomenal risk story’ for 2009

Iraq has, for the past five years, dominated Western news coverage with harrowing tales of sectarian strife, mass suicide bombings, and the collapse of social order and public services.

Its economy lies in tatters – the great rebuilding that lured Western companies with the promise of billions of dollars of U.S. government money was put almost permanently on hold after an insurgency broke out in 2004 that took no prisoners.

However the recent relative improvements in security led Fenning to announce that in 2009 and beyond investors searching for a case study of where political risk and business meet, “where the rubber hits the road”, should look no further than Iraq.

The now famous ‘surge’ launched by U.S. forces in January 2007 to combat the insurgency is finally bearing fruit, and violence is down more than 80% over the past 12 months whilst the Awakening Councils, Sunni militias paid off by the U.S. to fight Al-Qeada, are helping keep the peace. U.S. forces suffered more fatalities in Afghanistan for the first time this month, and you are now more likely to be kidnapped in Latin America than in Iraq.

This time though, Fenning claims, it’s not just about the oil. “Its telecommunications, its power, its food, its everything else,” he said, although being home to the world’s third largest oil reserves makes certainly makes it a more attractive place: “China and everyone else wants it [the oil]. It is a phenomenal political risk story.”

They certainly do. In late August and early September Iraq signed two major energy deals with foreign firms: a $3bn oil services contract with China National Petroleum Corporation and Shell signed a $4bn agreement to establish a joint venture with the South Gas Company in the Basra district of southern Iraq to process and market natural gas.

On Monday (October 13th) at an event in London, Iraq put the World’s largest ever amount of oil up for sale by offering 40bn barrels of recoverable crude across eight fields in the country. Up to now it has only sought to sign short-term service contracts to boost production at existing fields.

The auction has proved controversial, given that the country is still occupied and that there is massive disagreement in parliament on the streets about how the country’s ‘jewels’ should be managed, with many adamant that the oil industry should remain in state hands.

Gregg Muttitt, from the UK-based social and ecological justice group Platform, told The Guardian Newspaper that he is alarmed that the government is pushing ahead with its plans without the support of many in Iraq, and other groups such as UK based Hands Of Iraqi Oil have demonstrated against the dealings of BP and other oil majors looking at Iraq, brining unwanted negative publicity at a time of public resentment against high petrol prices.

As Fenning mentioned, investors are now looking at options other than oil, and are investing outside of Iraqi Kurdistan which has long been the popular choice for capital flows seeking sanctuary from the conflict in the south. Some of the biggest deals agreed or in the works concerning Western firms include news that France’s Larfarge is investing in several cement plants in the south, British companies have submitted proposals for construction projects in Najaf, and that an Italian company is offering consulting services for the port project in Basra.

Outside of energy, telecoms remain the biggest point of interest. Ali Al Dahwi, CEO of Kuwaiti telecoms giant Zain, told delegates at the Iraq Telecoms 2008 event on Monday that his company has invested $4.25bn in Iraq over the pat few years, making it the biggest foreign investor in Iraq in the non-oil sector. Zain, along with Asiacell (in conjunction with Qatari firm Qtel) and Korek (a Kurdish group) won three 15-year GSM licenses at an auction in August 2007 that netted the Iraqi government $3.75bn. Western firms such as Nokia Siemens Networks and Motorola have been involved in U.S. led telecoms projects, mainly infrastructure and services, since 2003.

Getting better, but political risk remains

Politics remains a messy affair in Iraq, with domestic troubles and meddlesome neighbours continuing to derail sustainable progress.

A Political Risk Alert issued by research house Business Monitor International (BMI) on October 2nd highlights the transition of the Awakening Councils from U.S. to Iraqi control. As Sunni’s, these militia are deeply mistrusted by the majority Shia led government, and Prime Minister Nouri Al-Maliki in particular who has made his concerns clear. He has promised to keep only 20% of these militias on the government payroll, and U.S. military figures have expressed concern that any enforced isolation could lead the militias to turn on the government once more.

“To the north of Baghdad, the thorny issue of the future status of Kirkuk will likely linger on for months if not years, and along a shorter time horizon the potential for conflict exists between Kurdish Peshmerga forces and Iraqi security forces in the border region between Iraqi Kurdistan and Iraq ‘proper’,” the alert says.

Whilst relations with its Arab neighbours having improved greatly, with many pledging to re-open embassies, and the threat that they may try to topple Al-Maliki subsiding, Iran persists in its attempts to destabilize Iraq.

In the run up to the January 2009 provincial elections, domestic political violence is expected to rise. On October 9th, a prominent politician, Saleh al-Auqaeili of Moqtada al-Sadr’s political party was killed in a car bomb. Many believe he was killed because of his party’s opposition to Al-Maliki, who earlier this year ordered Iraqi security troops to disarm Al-Sadr’s militias in a law and order exercise that was regarded by some as an open move against Al-Sadr himself.

But it seems that, especially in the oil sector, big companies are willing to factor in this risk. “There are security, political, and reputational risks here for oil companies but none of them will want to see one of their competitors gain an advantage,” according to Muttitt

Red tape and brown envelopes

At the telecoms conference, panelists throughout the day continued to proclaim that red tape, the self-interests of politicians, and a fear of privatization and the free market are bigger obstacles than security – something that affects companies across all sectors.

Iraq has been a centrally planned economy for decades and the state is by far the biggest employer in the country at present.

Ali Al Dahwi, CEO Zain and Diar Ahmed, CEO Asiacell, both complained that excessive and arbitrary taxation is unhelpful attracting foreign investment and that there is no clear decision making progress or administrative assessment in place. Contracts are often disputed in parliament and revisited when new faces assume ministerial roles in the country.

This is a problem that will not go away overnight, and is not helped by a fear of the free market and privatization. Steven J Spano, Brigadier General, US Air Force, Multinational Forces Iraq/CCJ6, gave the best explanation of the frictions between the private sector and state when he said that Iraq had lost its free market culture over a generation ago, and that it would take another generation for confidence in the private sector to return.

Corruption, rife in every aspect of economic life under Saddam, remains despite the establishment of a National Integrity Board in the parliament and efforts by coalition partners to help combat it. Iraq was ranked fourth from bottom in Transparency International’s 2008 corruption report.

Doing Business 2009, an annual World Bank report on the ease of doing business in a certain country, ranks Iraq 148th out of 181, slightly below Syria and Iran but above 19 places above Afghanistan. Although it ranks very poorly for opening a new business, trading across borders and enforcing contracts, ease of paying taxes and registering property put it within the top 25% of countries globally.

The 2008 Investment Climate for Iraq by the U.S. Department of State also offers a mixed message. Under the 2006 National Investment Law foreigners are not allowed to own land, “but are permitted to rent or lease land for up to fifty years (renewable). Foreign investors are also able to own investment portfolios in shares and securities,” the report says. A signatory of a number of treaties on arbitration and intellectual property, “it has not signed or adopted the two most important legal instruments for international commercial arbitration.”

The investment law was expected to open up its economy to foreign investment and is designed to give Iraq a more investor-friendly business environment. However, the report notes that “Implementation of the law will be a challenge for Iraq in 2008,” and the ability to pass and implement such laws remain Iraq’s greatest weakness. Constant tensions between Baghdad and the Kurdistan Regional Government (KRG) have led to the continued delay of the passing of the hugely important Petroleum Law, and will most likely hold up a parliamentary vote on the draft Telecoms law at the end of this year.

Iraq’s government has, according to a report by the Economist Intelligence Unit (EIU) on October 14th, “belatedly recognised the need to streamline decision-making structures to avoid political and bureaucratic bottlenecks and thus staunch politically dangerous popular discontent at the lack of basic amenities.” In July of this year it created a National Council for Reconstruction & Development with the power to bypass ministries in negotiating and signing contracts in strategic sectors.

Who you know and where you go

Operating in Iraq will remain dangerous for a while to come. Iraqi Kurdistan remains the safest option for investors, while Basra and Najaf are potential goldmines if the security situation holds, but that depends on Iraq’s internal politics and the influence of Iran.

“There are vastly different operating environments in countries that from a distance look very similar can be markedly different on the ground, and particularly for investors who are actually getting dirt under their fingernails” as opposed to observing from the outside, Fenning said.

“The reality of what its actually is like in terms of supply chain, in terms of corruption, in terms of operational activity is actually what makes the difference at the end of the day.”