Gas turbines to get power moving.

Baghdad is preparing to issue US$3 billion in one-year government bonds to finance a major redevelopment of Iraq's electricity, transport and water infrastructure. Banking sources believe this will be followed by instruments with longer term maturity periods as Iraq attempts to plug the gap in its annual budget due to earlier oil price falls.

The Council of Ministers has approved the first issue of government paper of the post-Saddam era.

The two bonds, one for US$2.4 billion and a second for US$600 million, will be predominantly underwritten by Iraq's state-owned banks and carry interest of 2%.

The larger bond will be used to subsidise the government's contracts with US electricity giant GE and Germany's Siemens, which were awarded multi-billion-dollar deals to rebuild Iraq's national grid last December.

The second US$600 million will finance reconstruction work on Iraq's railways and water network.

These are priority sectors in the reconstruction effort and the bonds can be set against obligatory government reserves, according to reports quoting the US embassy in Baghdad.

Iraq is facing a deficit of up to US$20 billion this year following the collapse in oil prices during the second half of 2008. Parliament passed a US$58.6 billion national budget for 2009 in March, slashed from the US$80 billion proposed in November last year.

A supplementary budget is also under consideration, with the government seeking parliamentary approval for a deferred payment scheme to finance US$66 billion of infrastructure projects across Iraq.

Yet, despite the reduction in expenditures, around US$20 billion of that figure will be deficit spending. This is made possible in part by the fact that a budgetary surplus of around US$35 billion remains from the 2008 oil boom.

Baghdad is talking to local and international banks about concessionary loans to bankroll some of the reconstruction effort, using projected future oil revenues as collateral.

Under the scheme, the government is targeting construction of housing, hospitals and schools, as well as water and sewage projects.

Observers say the bond issue is a step in the right direction and should herald similar, longer term deals in future.

However banking and commercial sources believe the one-year issues are too short.

As one US official was reported as saying in Baghdad: "Iraq needs to learn how to borrow. The government has no experience of internal debt because in the past it has always had plenty of money."

"From the perspective of building a secondary market, it would be nice to have longer term bonds. Baghdad has long had international debt, but needs to fund expenditures from domestic resources as well," the US official said.

The government is desperate to keep promises to the Iraqi population that the downturn in violence from 2008/09 would be matched by an improvement in services.

The fall in the oil price has severely dented Baghdad's capacity to get projects up and running.

In December last year, GE was awarded a US$3 billion deal to provide gas turbines capable of supplying 7,000MW of electricity to the country. This will more than double output in Iraq from its current 6,000MW, and will provide power for an additional 5.4 million homes.

Siemens won a US$2.1 billion contract to provide turbines for two new power plants, scheduled to come online by 2011.

Demand from the Iraqi grid averages about 10,000MW and shortages and cuts are frequent.

Even before the 2003 US-led invasion, the Iraqi power system had suffered years of under-investment and decay.

from Mutaz Basha, Dubai Office

(Image courtesy of Siemens press picture)