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Last Updated: Wednesday, 16 July, 2003, 15:44 GMT 16:44 UK
Iraq rebuilding 'could cost $90bn'
By Emma Clark
BBC News Online business reporter

Iraq needs up to $90bn (57bn) in investment to restore its economy to health, according to the latest assessment by experts.

The investment, which would focus on re-building infrastructure, will take a decade, said Achmed al-Shahrabani, who is leading a special Iraq initiative by management consultants McKinsey.

Soldiers on the streets of Baghdad
Reconstruction could take 10 years
Speaking at a conference on Iraq reconstruction in London, he said that oil revenues would not be enough to cover Iraq's economic rehabilitation.

Since the end of the war, the Coalition Provisional Authority (CPA) has focused on paying salaries in the public sector - which employs a sizeable proportion of the working population - and establishing a budget for 2003.

The US Army has also tendered various contracts to re-build some of the country's infrastructure, but much of the work so far has been short-term fixes.

Reconstruction bill

Iraq's oil industry would need $35bn-40bn - the lion's share of any investment - to increase production to 6 million-7 million barrels a day (b/d) by 2010, according to McKinsey.

Graph to show Iraq's oil reserves
Although, Iraq possesses the second largest oil reserves in the world, after Saudi Arabia, it currently has the capability to pump only 1.5 million b/d.

In addition, the country's healthcare system would need $10bn-20bn to restore facilities to pre-1980 standards.

"Iraq has a seriously dysfunctional economy but with enormous economic opportunities," Guy Gantley, an economic adviser at the British Foreign & Commonwealth Office, told the conference.

He added that any sustainable recovery would depend on market-oriented reform and donor financing from the international community.

The World Bank and the International Monetary Fund are currently running scoping missions in Iraq to discover the extent of the damage.

The results of the missions will provide a "roadmap to reconstruction" at an international donors' conference planned for the autumn.

Signs of recovery

Since the end of the war, incomes and spending have picked up, while the private sector has shown some signs of revival.

"The economy should grow quite fast," Mr Gantley said. "The challenge is sustainable high domestic growth.

Graph to show Iraq's GDP
"But if Iraq fails, there will be high levels of unemployment for a generation, which could be socially destabilising."

He added that the country should use its oil revenues to help diversify the economy away from dependence on oil.

Failure to do this would likely result in sharp swings in government income from year to year in line with international oil prices, making long-term economic planning all but impossible.

McKinsey estimates that under a best-case scenario, Iraq's economy could achieve a compound annual growth rate (CAGR) of 12-15% over the next 10 years.

A more modest estimate would be a CAGR of 3-5% over the same period.

Under a worst-case scenario, Iraq would remain state-led and oil-dominant with high unemployment, added Mr Gantley.

He blamed Iraq's problems on UN sanctions throughout the 1990s, as well as the policies of ex-president Saddam Hussein.

"It is hard to overstate the mess Iraq was in before the war," he said.

Other barriers to a long-term recovery are restrictions on foreign investment and the lack of a proper legal system to safeguard investments by international companies.

Iraq's estimated investment needs
Utilities Reconstruction of basic infrastructure such as transport facilities, telecommunications and utilities (power capacity currently at 1,800 MW compared with 9,500 MW pre-1990) $10bn-15bn just for electricity and telecoms
Oil & gas Re-establishing and increasing oil production capacity to 6 million-7 million barrels a day by 2010 $35bn-40bn
Healthcare Re-establishing pre-1980 health care facilities and standards $10bn-20bn
Education Rebuilding and upgrading of primary, secondary and tertiary education institutions $6bn-12bn
Transport infrastructure Rebuilding 40,000 km of paved roads, three main railway lines, three main airports, two ports Several billions
Source: McKinsey

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