These past few days have seen the withdrawal of US combat battalions in Iraq ahead of schedule. This is hardly what President Bush meant when he proclaimed “Mission accomplished” from an aircraft carrier back in 2004 but, it draws a line under the so-called “Liberation” phase and moves Iraq to what has been called a “New Dawn”. Here, we explore Iraq’s historical roots; take a look at the logistics of withdrawal and assess the position for logistics going forward. All logistics flows (physical movement; information; cash and, labour) will play a key role in building a viable market economy and yet, we see a clear need to develop a fresh logistics perspective fit for this challenge across diverse regions; high tech and low tech sectors and, hybrid supply chains that make do with what is in place. This is Transformational Logistics territory and could be a useful learning curve for other developing economies and, those markets moving to the third phase of Humanitarian response – rehabilitation.
History tells us that Iraq was carved out of part of the Ottoman Empire as it fell apart after World War 1 (1914-18). This was Mesopotamia, the land “between two rivers” (Tigris and Euphrates) which stretched back into antiquity and was, founded in 3500 BC, the cradle of civilisation. The Babylonians were the first to develop a system of economics and, made significant advances in maths. Based on the sexagesimal (base 60) numerical system it was the source of the 60 minute hour, 24 hour day and 360 degree circle. The sumarian calendar gave us our seven day week and these skills were of considerable use to the early map makers. Fast forward to World War 1 and, the Sykes Picot Agreement (1916) and a carve up of a defeated Ottoman Empire. Supported by Russia, France’s sphere of influence would be Syria and Lebanon and Great Britain’s Palestine and Iraq – which had Henry Cabot Lodge, a patrician senator from Massachusetts, thunder: “England is taking possession of the oil fields of the world”. Oil had been discovered in 1901 and, has played a major part in the Iraq story ever since.
Iraq is taken from the Arabic word for “venerable” and “well rooted” and yet, by the time the country was pulled together after the War it was far from being a settled and well rooted community. Seventy-five per cent of the population of Iraq was tribal, with no previous tradition of obedience to any single government. The geography was made up of the Kurds to the North who spoke an Indo European language and, an Arab grouping of Muslims split into a majority of Sunnis and a vociferous minority of Shiites. This was the assessment of the American Arabists of the day whatever the British, such as Gertrude Bell, said.* It was never going to be easy to consolidate Iraq and, fast forward to the most recent past and Iraq has been charged with conflict – a Report by a political think tank from Mumbai set the opportunity cost (1991 to 2010) for the wider Region at $12 trillion. Under Saddam, the war with Iran (1981-88) claimed 1.5 million lives at a cost of $100 billion. Then, after claims of slant drilling into Iraq by the Kuwaitis there was the First Gulf War to be followed by the shock and awe attack that toppled Saddam. The cost of all of this has been huge. For the US and Coalition the bill looks like being $1 trillion and, for Iraq itself GDP could have been 30 times present values. In other words, every Iraqi could have been earning $9,600 instead of $2,300 in 2010.
In one sense, Iraq was born of Logistics. The British sealed the Sykes Picot Agreement to ensure that they had control over strategic locations – Baghdad in the centre; Mosul to the North and, Basra on the coast to the south. The Germans started to build the iconic Berlin to Baghdad (and on to Basra) railway line in 1903 – it was completed in 1940. Both colonial powers were interested in two things – oil and, a route to India.
The US will be leaving a holding force of some 50,000 personnel to be part of the New Dawn phase of the Iraq project. Meanwhile, combat resources have been withdrawn. In personnel: 160,000 troops; 56,000 civilian contractors; 50,000 foreign workers. In materials: 618 helicopters; 1,900 tanks; 34,000 tons of ammunition; 43,000 vehicles; 100,000 pieces of rolling stock and 4 toxic waste sites. Then, there is the stock from the supermarket network that had served the US and Coalition community within Iraq. This included 2.7 million candy bars; 1.6 million cans of soda and 330,700 CDs and DVDs. As one US Army official put it: “this has been like picking up LA and moving it some place else.” And, they needed 240,000 truckloads; 120,000 containers; 8,000 convoys; 119 shiploads and 40 C-130 planes carrying 55 troops at a time; to do it. This does not come cheap. Every 747 cargo plane that left Iraq cost $1.3 million. This has happened quickly. The Vietnam withdrawal of 365,000 troops and all their baggage took place over a much longer period from 1969 to 73. And yet, for all the talk of withdrawal, no one can be under any illusion that success will be defined by what is left behind.
Now, for Operation New Dawn – this is the next phase of Iraq’s journey to a fully functioning democracy – and market economy. Even the most optimistic pundits estimate that this will take eight to ten years before Iraq is self sustaining financially. The slightly improved security situation is enabling Iraq to make slow progress economically; especially in the retail and manufacturing sector. Growth is currently around 5 per cent and, company registrations are up to 34,000 from 5,000 in 2005. However, there can be no denying that the position is fragile. In terms of a viable market economy and sustainable development going forward the biggest challenge is with youth. With 300,000 Iraqi youths aged 10-18 having had no school education whatsoever; 65 per cent of them are not able to use a computer; 30 per cent are unemployed (which is double the national average according to one estimate) and one quarter of the population as a whole lives in poverty. The security situation makes it easier for terrorist groups to mop up this inactive group and, creates a vicious cycle of poverty and extremism that will be extremely hard to break.
One shopkeeper in Rabat puts it succinctly, “I hated the Americans for what they have done to my country but, they had become the safety valve. They were the disease and the medicine at the same time.” (FT, 26 August 2010) Since 2003 106,339 Iraqi civilians have been killed; 4,417 US Troops and 179 UK troops have been killed and, 300+ foreign hostages have been kidnapped. Meanwhile, the USA has spent about $54 billion on reconstruction – they are spending $5 billion per month in Afghanistan – with $18 billion going to the development of Iraqi security forces after disbanding Saddam Hussein’s police and army units. The US Iraq Reconstruction fund received $21 billion with the rest going into smaller funds. Value for money has been hard to monitor and track but it is estimated that 15 to 20 per cent of the rebuilding funds were lost to waste and corruption with incomplete projects being a significant feature of the effort. Other sources close to the PMO (Project Management Organisation) put waste at closer to 60 per cent than these figures. TL spoke with several people who had extensive experience on the ground in Iraq and a common theme was that there has been a poor coordination for managing reconstruction programmes by the project teams and transition into civilian organisations and locally based private business. Congressman Henry Waxman was told by members of the Iraqi Government that the costs to rebuild Iraq would have been up to 90 per cent less had local companies and not American Contractors – immune from prosecution in Iraqi Courts – been used.
The Lessons in Program and Project Management Report (2007) prepared by the US State Department makes clear a number of shortcomings and stresses the fact that capacity development strategies had not “been adequately integrated with the overall effort”. Understatement. In the same Report it is made clear that when the invasion was planned it was assumed that, being a State rich in Oil Reserves, Iraq would be back to normal inside 18 months – unlike Bosnia. This was not the case and looting and insurgency dislocated all efforts dramatically. This was not helped by the vacuum created by the disbanding of the Saddam’s military and security apparatus in its entirety.
In TL terms there has been a long history of performance based logistics (get the job done in military and humanitarian terms) in Iraq and now, there has to be a switch to supply chains that can adapt to a business ethos over time. This is a very big ask and conventional logistics does not have all the answers. It is not even asking the right questions.
Iraq remains massively dependent on its vast wealth of natural resources, with oil and gas accounting for 90 per cent of the government’s revenues. Iraq has 115 billion barrels of oil reserves – which is the 4th largest after Saudi Arabia, Canada and Iran – though others estimate that there are another 100 billion barrels available. There are only 2,000 wells – which compares with over 1 million in Texas alone – and, Iraq is regarded as one of the cheapest places to prospect. With Iraq’s oil output expected to quadruple over the next 10 years and, as with the world’s 10th largest natural gas reserve, the attraction for foreign energy companies is clear.
Like Russia and other countries rich in natural resources, Iraq has much to do to develop a diversified economy. Manufacturing – which is concentrated around serving the Energy sector – is roughly 13 per cent of GDP and, employs an estimated 22 per cent of the workforce. Construction has a massive potential as the nation building project gathers pace in domestic hands. Then, there is food. Food prices in Iraq doubled from 2004 to 2008 – versus a 73 per cent hike globally and agriculture was not helped by an 800 per cent rise in domestic fuel prices. decline in meat consumption in favour of beans and lentils. The food sector has been highly subsidised and run by the State PDS (Public Distribution System) depending largely on imports. The Kurdish Region leads in agricultural production though there is a serious shortage of labour. This is a legacy of the Saddam years when the infamous Anfal campaign destroyed 3,500 villages driving people into exile or, into the towns. As efforts increase to develop an Agri Business, there is a need to have people move back to their villages from the towns – but the younger generation sees their future in places like Erbil.
Iraq has a population of 22 million with strong Regional differences; 15 to 20 per cent are Kurds living in the North. Baghdad has always been the centre of the Administration and business but this was heavily disrupted during recent conflicts. Traditionally, the centre of Government, it has been characterised by a variety of industries – leather, furniture, wood and processed foods as well as chemicals and oil related manufacturing. And, in a move to build back community ties, the Coalition built in 2004 the community based Retail food market located by the side of a highway and in the middle of a residential community. Designed for secure shopping, it features safe food storage and sanitary food handling facilities. This is not like the Shopping Malls of Shanghai, Mumbai and Dubai but, has a major role to play in shaping supply chain thinking and, a modern community. This could be an excellent T L Case Study with applications elsewhere in transitional economies.
At the other end of the scale, in May 2010, eight firms were shortlisted for the $3 billion metro project with two lines planned – one of 21 kms and a second of 18 kms. However, despite all of the major projects in the pipeline, business ventures are not easy. For example, the process of setting up a business involves 11 procedures, 11 different ministeries and takes an average of 77 days. It can cost up to $3,000 to complete this procedure and, when you are through there are significant levels of corruption to deal with. It is estimated that bribes on many business deals can cost between 20 and 40 per cent. These “official” and consequent costs of doing business have a significant impact on the shape of business all over Iraq and act as a clear incentive to work in the shadow economy. It is ironic that the law can act as a catalyst to send a firm to the margins. This is an issue all over the developing world and well covered by the likes of De Soto and the other legalist observers of the informal economy.
Then, there is Basra to the South – the second most populous Iraqi City. Historically the home of Sinbad the Sailor; Basra features in H G Wells book, The Shape of Things To Come, where the City is at the centre of an emerging World State. These days, Basra – as the home of six ports – has a major opportunity to play a key role in Port logistics. However, much momentum has been lost to other Ports of entry in neighbouring countries. For example, Aqaba in Jordan has developed a strong Iraqi trade over the time of the troubles.
The fact is that security concerns have affected economic momentum in Baghdad and Basra whilst the Kurdish Region further North has had no such brake on its economic performance. The Kurdish Region has a significantly more developed economy than the rest of Iraq. The Kurdish Region has an oil reserve of 43 billion barrels and the majority of natural gas reserves with 200 trillion cubic feet. In 2004, per capita income was 25 % higher and, the security position has a major part to play in this. According to the KRG website, not a single coalition soldier has been killed nor a single foreigner kidnapped in the Kurdish Region since the 2003 invasion of Iraq.
The Kurds are the biggest nation on earth without a country. There are 30 million Kurds worldwide; a global diaspora of an estimated 5 million and the balance in Turkey, Syria and, Northern Iraq. The Kurdish community has had a tough history and, under Saddam the economy was doubly challenged with International sanctions on Iraq and, with Iraqi sanctions on the Kurdish Region. These days, the Kurdish Region is thinking big. This is where Nation building is far more than a metaphor. Already an International airport has been built at a cost of $300 million in Erbil – likened to Dubai for its ambition. There are at least six 5 star hotels and inward investment momentum is building. A UAE company is operating the Carrefour licence and, $60 million has been invested in a Shopping Mall hosting more than 65 branded stores. All of this takes signficant logistics and supply chain support. The Kurdish Region flies its own flag – the Iraqi flag is not seen and, from 1991 schooling is conducted in the Kurdish Language with English invariably replacing Arabic as the second language taught. Kurdish is an Indo European language and, on the streets few would consider themselves as Iraqis. And yet, there are those who see a thriving Kurdish Region as vital to the long term stability of Iraq as a whole. It would be one of histories ironies if, after centuries of persecution and alienation the Kurds end up leading the renaissance.
Perhaps the first major change is a definitive shift from military style performance based logistics to a commercial proposition. At the height of the invasion, the need was for equipment that would get the job done and, when in doubt, the logistics decision was “just lift” – use airborne options. Now, the transition demands a focus on commercial realities. Assets are judged on life time value and maintenance is factored in. In logistics and supply chain terms, the military had come to rely on commercial supply lines and commercial logistics providers. In fact, a Northern Distribution Network from Europe across Russia and Central Asia to Africa has been established over time that is run by 3 private companies – APL, Maersk and Hapag Lloyd. This should make adaptation to commercial logistics needs easier. One of the biggest challenges is consistent electrical supply – 15.5 hours per day is the average number of hours of electricity per day in Baghdad. This is a marked improvement from six hours three years ago but still not up to the 24 hour coverage of pre-invasion Iraq.
The availability of funds, cash flow and the need for banking support comes into play as a logistics consideration. Most companies – outside of the Kurdish Region – have to budget an estimated 30 per cent of their operating expense security. This is money well spent to create the right climate for business but reduces investment for hospitals, schools and infrastructure. However, those big money projects that are sanctioned come with large risks. Even the in the USA corruption is an issue for Big projects. Last year the Washington Post reported that $1.2 billion of stimulus contracts had been awarded to companies accused of previous misconduct when handling federal business. Imagine the problems in places like Iraq where the middle class exodus over the years has left the country with a major skills shortage. In fact, according to the US Agency for International Development, over $1 billion across Iraq was spent on worker training in 2004 alone. And most of this was spent in the Public sector, the army, the oil sector and, security.
The nature of the firm within the Iraqi economy as a whole needs more research. The informal sector – which in places like Afghanistan is over 90 per cent – is an issue in Iraq’s transition. This introduces the notion of the asymmetrical supply chains that we see in other Emerging and Developing markets with low tech and fragmented industries feeding larger firms elsewhere. Small enterprises are short of cash and the weak retail banking sector has a long way to go to offer a viable and consistent source of funds. Iraq remains a cash economy and, as consumption starts to pick up small enterprises are feeling the heat of competition from China and elsewhere.
Summing up. The Iraq story is complex and, as we look forward, we need to look beyond the recent past but we cannot ignore structural issues that were there at the birth of the Nation. In many ways, the task is not to replace what was destroyed; it is to construct what was not there in the first place. For example, the Kurdish Region had no viable logistics footprint before 1991 in any case. Also, the economy was (and is) geared to the energy sector with manufacturing and services linked to the needs of this heavy industry. There was no real thought into the growth of a diversified economy beyond oil (dairy, textiles, leather) or, more in tune with the villages – that in the Kurdish Region had been destroyed in any case. These are asymmetrical supply chains and do not approximate to any homogenous one-size-fits all model.
Supply chains, not companies compete these days and T L questions how these supply chains can be created and developed purely through the invisible hand of free markets. For example, one day food is distributed by the Government agencies and the next it is to be distributed on the open market. There needs to be a strategy that can deliver sustainable growth through supply chain thinking that embraces a more pluralistic economic model. There are too many anomolies: the distortions of oil price volatility; the high degree of informal relationships; a serious security issue; corruption; the lack of a retail banking sector capable of serving small enterprises and, the lack of logistics research and tools to deal with these market realities. Globalisation has not delivered a homogenous set of markets and, Iraq is a clear example of an economy that has not delivered a homogenous state or, logistics context. This is not to make a political point – China; India and other emerging and developing countries are characterised by significant regional variations. The point is that logistics thinking and practice has to have a response to conditions that do not exist in the developed economies. This means an acknowledgement of intermediate size and intermediate and appropriate technologies as well as the push on oil.
All things considered, we see logistics in Iraq as a classic example of what T L represents. Iraq is not a settled state; it has a significant set of asymmetrical or hybrid supply chains; a high percentage of informal firms and employment and, a number of more traditional industries that do not need high tech solutions but can improve their performance with low tech techniques. Earlier, on this Blog, we described how T L can play a role in transitional economies and, follow the military and humanitarian logistics phases with a bridge to a fully functioning market economy. It is not just a case of a set of tools that can be used. It is clear that logistics in these market conditions needs to be supported by far more research, dialogue and mentoring. Iraq will not become a fully functioning market economy on automatic pilot after the troops move out. There must be a coherent approach to follow military and humanitarian logistics. To paraphrase an old Arabic proverb – the military tents have been pulled; the dogs may bark still but, the logistics caravan has to move on. Transformational Logistics can be a catalyst for these exciting times.
* For more detail on this fascinating story about the time of the Great War see: Kaplan, The Arabists (1995); Fromkin, A peace to end all peace (1989) and, the books by a set of British eccentrics from Doughty; Burton; Philby; Gertrude Bell and, Lawrence – better known as Lawrence of Arabia and, the man who described Iraq as a “blunderland”. The German Wassmuss was another with an amazing insight into this complex land.