Sectarian violence and acts of war and terrorism declined dramatically in Iraq over the course of 2008. These security gains remained fragile, and potential investors still identified security as their chief concern when considering whether to build a business here. Nevertheless, reduced violence offered the Government of Iraq (GOI) and the Iraqi private sector the space to move more actively toward putting in place a modern business and investment climate.
There were several advances in 2008: The GOI created the National and Provincial Investment Commissions; two large state-owned banks made progress toward restructuring; and the private banking sector grew significantly. The GOI also made steady, if slow, progress towards World Trade Organization (WTO) accession. However, the overall investment climate remained unfriendly, especially to small and medium investors. The GOI did not enact key laws and regulations to improve the investment climate, nor did it act to comply with international instruments. In addition to the still significant security concerns, cumbersome procedures for new business registration, long delays, unclear land and property titling, unreliable dispute resolution mechanisms and endemic allegations of corruption also deterred investment. More broadly, a legacy of central planning and inefficient state-owned enterprises continues to slow Iraq’s attempts to become more market-based. In its 2008 “Doing Business” Report, the World Bank ranked Iraq 152nd of 181 nations overall.
Openness To Foreign Investment
The GOI has stated its commitment to attracting foreign investment and made several efforts in 2008 to improve its investment climate. It continued to implement the National Investment Law (NIL) of 2006, which provides a good base line for a modern legal structure to protect foreign and domestic investors. It provides for tax and other incentives, and once implementing regulations are added, the NIL’s provisions should provide an open investment regime for foreign investors. However, the NIL does not permit foreign investors to own land, though they may lease (for 50 years, renewable). It also does not cover investments in the oil, banking and insurance sectors. (A copy of the National Investment Law can be obtained from the U.S. Department of Commerce Iraq Task Force website – http://www.export.gov/iraq/.) The GOI and regional authorities have sponsored several conferences intended to attract investors, including the November 2008 U.S.-Iraq Dialogue on Business and Investment Climate, which focused attracting U.S. investors.
In accordance with the NIL, the GOI formed the National Investment Commission (NIC) and established Provincial Investment Commissions (PICs) in every province in 2008. The NIC and the PICs are designed to be “one-stop shops” that can provide information, sign contracts, and facilitate registration for new foreign and domestic investors. In addition to being on a steep learning curve, Investment Commissioners struggled with unclear lines of authority, budget restrictions, and the absence of regulations and standard operating procedures. The GOI also failed to confirm the NIC Chairman-Designate and later dismissed him. This uncertain leadership situation -- along with other equally significant problems, including unclear land transfer policies, a lack of infrastructure coordination for investment projects, and provincial governments’ inability to manage and facilitate investment projects -- contributed to the fact that many of the investments the NIC had announced did not actually break ground.
Regulation of investment is not an exclusive federal power, so the Kurdish Regional Government (KRG) and the national government both have the right to regulate investment. The KRG has its own investment law (Law 89 of 2004). The most significant difference between the KRG investment law and the national law is that the regional law allows foreigners to own land. Under the Iraqi Constitution, when there is a contradiction between regional and national legislation in the area of land ownership, the regional law becomes applicable; in Kurdistan, KRG investment law has been applied in practice to the benefit of foreign investors for land ownership and oil contracts.
Currency Conversion And Transfer Policies
The currency of Iraq is the Dinar (IQD - sometimes referred to as the New Iraqi Dinar). The Iraqi authorities confirm that in practice there are no restrictions on current and capital transactions involving currency exchange as long as underlying transactions are supported by valid documentation. The International Monetary Fund’s annual publication on Exchange Arrangements and Restrictions states that: “Restrictions on capital transactions are not enforced; however, documentation and reporting requirements apply.” The National Investment Law contains provisions that, once implemented, would allow investors to bank and transfer capital inside or outside of Iraq.
The Government of Iraq’s monetary policy since 2003 has focused on maintaining price stability primarily by appreciating the IQD against the US dollar while seeking to maintain exchange rate predictability. Banks may engage in spot transactions in any currency, but are not allowed to engage in forward transactions in Iraqi Dinar for speculative purposes. There are no taxes or subsidies on purchases or sales of foreign exchange. Improved security has allowed for an increased supply of goods and services, which has reduced inflationary pressures as compared to 2006. The Central Bank’s monetary and exchange rate policies have continued to help temper inflation, which is down from a high of 76.6 percent in 2006 to 12.3 percent in November 2008.
Expropriation And Compensation
Article 23 (Second) of the Iraqi Constitution prohibits expropriation in Iraq, unless it is "for the purpose of public benefit in return for just compensation." The constitutional provision further stipulates that this provision shall be regulated by law, but legislation has yet to be considered. Article 12 (Third) of the National Investment Law also guarantees “non-seizure or nationalization of the investment project covered by the provisions of this law in whole or in part, except for a project on which a final judicial judgment was issued,” but the absence of implementing regulation makes the application of the law uncertain in practice. As a result, whether foreign investors will enjoy protection from expropriation that meets international standards will likely depend on domestic implementing legislation and/or future bilateral treaty obligations with investor states. The United States does not have a Bilateral Investment Treaty (BIT) with Iraq.
While the law of domestic arbitration is fairly well developed in Iraq, international arbitration is not sufficiently supported by Iraqi law. Iraq is a signatory to the League of Arab States Convention on Commercial Arbitration (1987) and the Riyadh Convention on Judicial Cooperation (1983), but it has not signed or adopted the two most important legal instruments for international commercial arbitration: The United Nations New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958 -- commonly called the New York Convention) and the attendant rules and procedures established by the UN Commission on International Trade Law (UNCITRAL).
Article 27 of the NIL, which details the rights of Iraqis and foreigners with respect to Iraqi law, refers to dispute resolution. However, the absence of implementing regulation makes application of the law uncertain in practice.
Domestic arbitration is provided for in Articles 251-276 of the Iraqi Civil Procedure Code, which require arbitration agreements to be in writing. Panels of arbitrators are available through the Iraqi Union of Engineers, the Iraqi Federation of Industries, and private arbitrators.
Performance Requirements And Incentives
The NIL allows in theory both domestic and foreign investors to qualify for incentives equally. It also allows for investors to take out capital brought into Iraq, and its proceeds, in accordance with the law. Foreign investors are able to trade in shares and securities listed on the Iraqi Stock Exchange. In principle, the law also allows investors who have obtained an investment license to enjoy exemptions from taxes and fees for a period of ten years. Hotels, tourist institutions, hospitals, health institutions, rehabilitation centers and scientific organizations also are granted additional exemptions from duties and taxes on their imports of furniture and other furnishings. The exemption theoretically increases to fifteen years if Iraqi investors own more than fifty percent of the project; however, the absence of implementing regulation makes uncertain the application of the law in practice.
Right To Private Ownership And Establishment
The National Investment Law does not allow foreigners to own land. Foreign investors 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.
Protection Of Property Rights
Iraq currently does not have adequate statutory protection for intellectual property rights (IPR). The GOI is in the process of developing a new IPR law to comply with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The draft law covers patent, trademark and copyright, and it is hoped that strong implementing regulations will help consolidate IPR protection functions, which are currently spread across several ministries, into a “one-stop” IPR office. (Currently, the Central Organization on Standards and Quality Control (COSQC), an agency within the Ministry of Planning, handles the patent registry and industrial design registry; the Ministry of Culture handles copyrights; and the Ministry of Industry and Minerals houses the office that deals with trademarks.) Although the new draft will offer adequate statutory IPR protections, it has been stalled in the constitutional review process since mid-2007. The GOI’s ability to enforce IPR protections remains weak.
Iraq is a signatory to several international intellectual property conventions, and to regional or bilateral arrangements, which include:
Transparency Of The Regulatory System
The absence of implementing regulation for the National Investment Law makes uncertain the application of the law in practice. Once fully implemented, the law would establish a legal framework for investment. Potential investors would nonetheless still face significant hurdles in understanding the basic steps for starting and operating a business in Iraq given the complexity of Iraq's existing laws, regulations, and administrative procedures. The Iraqi Government has established and staffed National and Provincial Investment Commissions (NIC / PICs) as required under the National Investment Law. The NIC announced in October that in its first 10 months of existence, it had attracted $74 billion in FDI to Iraq (although only a fraction of that has progressed to the stage of an actual signed investment contract). PICs have also been active in assisting regional investors. However, NIC and PIC Commissioners and their staff lack training and expertise, and have not developed an effective “One Stop Shop” for investors to ease their entrance into the Iraqi market. The U.S. government and other donors are sponsoring significant capacity development for both the NIC and PICs; however, these initiatives will take time to pay dividends for Iraq’s investment regime.
The absence of other laws in areas of interest to foreign investors also creates ambiguity. Iraq’s WTO Legislative Action Plan for the Implementation of WTO Agreements -- the legislative “road map” for Iraq’s eventual WTO accession -- requires competition and consumer protection laws that are critical for leveling the business playing field. Both are in the drafting stage with the competent Ministry and were expected to be sent to the Council of Representatives in 2008, but they have been delayed. Without a competition law, investors do not have statutory protection against unfair business practices such as price-fixing by competitors, bid rigging, and abuse of dominant position in the market. Likewise, the lack of a consumer protection law means that investors and consumers have no standard definition of unfair business practices. While the Iraqis do not currently have a building code for new construction, the GOI is currently evaluating this area.
The way in which the Iraqi government promulgates regulations is opaque and lends itself to arbitrary use. Regulations imposing duties on citizens or private businesses are required to be published in the Gazette. However, internal Ministerial regulations are not. This loophole allows bureaucrats to create internal requirements, procedures or other “turnstiles” with little or no oversight and use them to place additional burdens or exact payoffs from investors or other businesspersons.
Efficient Capital Markets And Portfolio Investment
The Central Bank of Iraq (CBI) is responsible for conducting monetary policy in Iraq. The CBI was re-organized by CPA Order No. 56 as a legal public entity that has financial and administrative independence. The Iraqi banking system includes seven state-owned banks, the two largest being Rafidain and Rasheed, which account for about 96 percent of banking sector assets. There are also 32 private banks and six Islamic banks licensed by the CBI (see CBI’s website – www.cbiraq.org). Eleven foreign banks have either been licensed or have strategic investments in Iraqi banks.
Although the volume of bank lending is growing, the majority of banking operations remain confined to fee-based services. The provision of credit is therefore largely conducted among individuals in private transactions. Financial transfers from the government to provincial authorities or individuals, rather than business loans, is the major activity of the private banks; Iraq’s economy remains primarily cash-based.
The Trade Bank of Iraq (TBI) was established as an independent government entity under CPA Order No. 20 in 2003. The TBI's main purpose is to provide financial and related services to facilitate import trade, particularly letters of credit. In early 2008 the Ministry of Finance expanded trade finance opportunities for private banks by allowing letters of credits in amounts up to $2 million to be processed through the TBI and distributed to private banks. There is discussion at the Finance Ministry about raising this threshold.
The letter of the National Investment Law allows for foreign investors to exchange shares and securities listed in the Iraqi Stock Exchange (ISX). It also allows foreign investors to form investment portfolios. Trading transactions and buy and sell orders are presently written by hand on grease boards in trading sessions. The automation of the ISX, expected in 2009, will provide greater speed and transparency than the current system. There are also discussions about allowing shares to be dematerialized (electronic book keeping by custodians) thereby easing the logistical burden of transferring physical certificates. In addition, a new permanent securities law has largely completed the Constitutional review process and could move to the Council of Representatives for enactment in 2009, and rules and regulations for the Iraqi Securities Commission (ISC) have been completed. Until the new law passes, an extension of previous regulations will secure the status of the ISC.
Security continues to be a serious concern of the Iraqi Government. Despite great improvements in 2008, Iraq remains dangerous, volatile and unpredictable; interested investors still cite security as their primary obstacle when seeking to enter the Iraqi market. Violence against both foreigners and Iraqis persists, and the threat of attacks against U.S. citizens and facilities remains high. In addition, roads and other public areas continue to be dangerous for Iraqi or foreign travelers. Law enforcement is limited, although new Iraqi police units continue to be trained and deployed. Attacks against military and civilian targets throughout Iraq continue, including in the International (or "Green") Zone.
Targets include trucking and military convoys, hotels, restaurants, police stations, security checkpoints, foreign diplomatic missions, international organizations and other locations with expatriate personnel. In addition, there have been planned and random killings, as well as extortions and kidnappings. U.S. citizens and other foreigners, as well as Iraqi officials and citizens continue to be targeted by insurgent groups and opportunistic criminals for kidnapping and murder.
The U.S. Department of State issues up-to-date travel warnings for countries throughout the world, and U.S. companies and visitors are advised to assess carefully the situation in Iraq by consulting the Department's Travel Warning at http://travel.state.gov/travel/iraq_warning.html and its Consular Information Sheet at http://travel.state.gov/travel/iraq.html. These sites contain the essential security and safety information on travel to Iraq.
In addition to violence, investors must be prepared to deal with unreliable delivery of essential sewer, water and electrical services and the impact this has on business development and operating costs.
Corruption in all areas remains a significant problem. Under Saddam's regime, corruption was a fact of life for every Iraqi and touched upon every economic transaction. The former regime's control of the economy left a legacy of heavy state procurement and subsidies distorting market prices. Unfortunately, undoing this legacy will be a long process, and investors still may have to contend with requests for bribes or kickbacks from government officials at all levels.
The Commission on Public Integrity (CPI) (now known as the Commission on Integrity or Integrity Commission – COI) is an independent, autonomous Iraqi governmental agency, established by CPA Order No. 55, responsible for anti-corruption, law enforcement and crime prevention, as well as public education on these topics. COI investigates nationwide allegations of corruption within the government and refers cases to the Iraqi judiciary. It performs its duties in conjunction with the Board of Supreme Audit (BSA) and the Inspectors General (IG) from each ministry. There is a need to impose and enforce credible penalties for government corruption, specifically adherence to laws related to government contracts, procurement and allegations of bribery. The number of corruption cases brought to a successful conclusion remains quite small and at the lower levels, and the statutory and regulatory provisions intended to control corruption will require substantial revision to be effective.
Transparency International in its Corruption Perception Index (CPI) has ranked Iraq in a tie for 2nd to last place. While part of this perception is due to the legacy left by Saddam Hussein, there is ample evidence that corruption remains a major challenge unless there are significant changes in the Iraqi government and its body politic.
Iraq signed and ratified the United Nations Convention against Corruption in March 2008 and is just starting the process of self evaluation on what changes are required to come into compliance. This process is likely to be the next big test of political will as to whether Iraq is serious about confronting corruption. Iraq has also endorsed the World Bank’s Extractive Industry Transparency Initiative and is seeking to become a full member.
Bilateral Investment Agreements And Regional Cooperation
Iraq is a signatory to some form of investor protection agreement or memorandum of understanding with thirty-two bilateral partners and nine multilateral groupings. However, none of these is as all-encompassing as a U.S. Bilateral Investment Treaty (BIT). These agreements include arrangements on Investments Promotion and Protection (IPPA) within the Arab League, as well as some type of bilateral agreements with other countries including Afghanistan, Bangladesh, India, Iran, Japan, Jordan, Kuwait, Germany, Mauritania, Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam and Yemen. These agreements include general provisions on promoting and protecting investments, including clauses on profit repatriation, access to arbitration and dispute settlements, fair expropriation rules and compensation for losses. However, the Iraqi government’s ability to enforce them remains uneven.
In addition, Iraq has bilateral free trade area (FTA) agreements with the following eleven countries: Algeria, Egypt, Jordan, Lebanon, Oman, Qatar, Sudan, Syria, Tunisia, Yemen, and the United Arab Emirates. Iraq is also a signatory to several multilateral agreements, including the "Taysir" agreement with Arab countries dated February 27, 1982, and ratified in January 11, 1982.
On July 11, 2005, Iraq and the U.S. signed a Trade and Investment Framework Agreement (TIFA) as a first step toward increasing trade and investment cooperation between the U.S. and Iraq. The Iraqi Parliament has yet to ratify this agreement.
OPIC And Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) and the Government of Iraq executed an Investment Incentive Agreement (IIA) in 2005. However, the Iraqi Parliament has yet to ratify this agreement. Without the IIA, OPIC has been able to offer programs in Iraq on a temporary basis and only because of a unique Congressional waiver of OPIC’s statutory IIA requirement. These include the ability to finance a variety of investment projects with substantial U.S. participation. Some of OPIC's basic programs include structured finance projects; political risk insurance; investment funds and financing for small and medium-sized enterprises; and a planned mortgage pilot program.
Iraqi labor law remains weak in promoting a flexible, business-friendly employment environment. The existing Saddam-era law includes non-supportive benefit clauses, working conditions for foreign expatriate workers, and rules governing working hours.
Iraq is a party to both International Labor Organization (ILO) Conventions related to youth employment, including child labor abuse. The Ministry of Labor and Social Affairs (MOLSA) also sets a minimum monthly wage for unskilled workers. In addition, according to Iraqi law, all employers must provide some level of transport, accommodation, and food allowances for each employee. The law does not fix allowance amounts.
The National Investment Law states that priority in employment and recruitment shall be given to Iraqis. In addition, foreign investors are expected to help train Iraqi employees as well as to raise their efficiency, skill, and capabilities. There are existing labor-related requirements for foreign companies employing Iraqi or foreign workers.
Foreign Trade Zones And Ports
The Free Zone Authority Law No. 3/1998 (FZL) permitted investment in Free Zones (FZ) through industrial, commercial, and service projects. This law operates under the Instructions for Free Zone Management and the Regulation of Investors' Business No. 4/1999 and is implemented by the Free Zones Commission in the Ministry of Finance.
In theory, capital, profits, and investment income from projects in an FZ are exempt from all taxes and fees throughout the life of the project, including in the foundation and construction phases. Goods entering into Iraqi commerce from FZs are subject to Iraq’s 5 percent tariff; no duty is leveled on exports from FZs.
Activities permitted in Free Zones include: (a) industrial activities such as, assembly, installation, sorting, and refilling processes; (b) storage, re-export and trading operations; (c) service and storage projects and transport of all kinds; (d) banking, insurance and reinsurance activities; and (e) supplementary and auxiliary professional and service activities. Prohibited activities include actions disallowed by other laws in force, such as weapons manufacture, environmentally-polluting industries and those banned because of place of origin.
There are currently four geographic areas designated as Free Zones. The Basrah/Khor al-Zubair Free Zone is located 40 miles southwest of Basrah on the Arab Gulf at the Khor al-Zubair seaport. This area has been operational since June 2004. The Ninewa/Falafel Free Zone is located in the north, near roads and railways that reach Turkey, Syria, Jordan and the Basrah ports. The Al-Qa'im Free Zone is on the Iraqi–Syrian border and is being rehabilitated to its pre-2003 state, and an undeveloped zone in Fallujah is in the planning stages. In the Kurdish area a separate zone is being developed in Sulaymaniyah, to be lead by private master developers. Two other zones are in the discussion stage in the region: Erbil and Zarko. However, none of these areas is operating as a significant focal point for investment or trade, and only the Ninewa/Falafel zone has businesses operating in it. The Free Zone Commission lacks operational vision and capacity.
Foreign Direct Investment Statistics
The National Investment Commission and 15 Provincial Investment Commissions outside of the KRG signed or successfully concluded negotiations on investment licenses totaling 2 billion USD from January to November 2008, which also included capital from some Iraqi firms. Two foreign investor consortia also signed joint venture investments in two state-owned factories with the Ministry of Industry, totaling 300 million USD. According to the KRG Investment Board, foreign investment in the region totaled 15 billion USD between 2007 and the first half of 2008.