Interest in investing in Iraq has risen strongly, following substantial improvements in its security situation in the last year. Potential investors still note security concerns, but now are more likely to cite regulatory hindrances and other practical barriers to doing business as their key issues. While the end of 2009 and early 2010 saw a series of high-profile bombings targeting hotels and government offices, the frequency of broader sectarian violence and acts of war and terrorism continued to decline during 2009. This provided the Government of Iraq (GOI) and the Iraqi private sector the opportunity to make substantial progress toward improving the business and investment climate. In particular, the GOI expanded the capacity and functionality of the National and Provincial Investment Commissions and passed an amendment to the National Investment Law to clarify land use issues; the private banking sector also enjoyed growth. The GOI held two oil licensing (“bid”) rounds in which 44 foreign firms were allowed to bid for contracts to develop a substantial portion of Iraq’s oil resources (fields holding an estimated 62 billion barrels, or 54 percent of its proven reserves). The awarded contracts could increase Iraq’s oil export capacity by 500 percent over seven years, although internal infrastructure limitations and other factors will likely limit realization of this export potential. Iraq’s oil licensing rounds in 2009 may have been the world’s largest ever and were widely regarded as open, equitable, transparent, competitive, and free from corruption. The oil contracts awarded are expected to bring billions of dollars in foreign direct investment in the coming years and spur the growth of the foreign and domestic private sector in Iraq.
Despite these positive developments, the overall investment climate remained difficult and challenging, especially for small and medium investors. Potential investors should prepare themselves for significant security costs; cumbersome and confusing procedures for business visas or new business registration; long payment delays on some Iraqi government contracts; and sometimes unreliable, non-transparent dispute resolution mechanisms. Allegations of corruption are still endemic, and the legacy of central planning and inefficient state-owned enterprises continue to inhibit economic development. In its 2010 Doing Business Report, the World Bank ranked Iraq 153 out of 183 on the ease of doing business.
Openness to Foreign Investment
The GOI has publicly stated its commitment to attracting foreign investment and took several steps in 2009 to improve its investment climate. The government passed long-awaited implementing regulations to the National Investment Law (NIL) of 2006, which provides a baseline for a modern legal structure to protect foreign and domestic investors in addition to tax and other incentives. Additionally, the GOI passed an amendment to the NIL that allows for limited foreign ownership of land, albeit solely for the purpose of developing residential real estate projects. The amendment also sought to bring clarity to land allocation and use, a major inhibitor to investment. Unfortunately, a large majority of licensed investment projects remain stalled due to continuing confusion over land use responsibility at both the provincial and national level. (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 National Investment Commission, together with select Provincial Investment Commissions, participated in several international conferences intended to attract investors to Iraq, including the October 2009 U.S.-Iraq Business and Investment Conference in Washington, D.C. This conference, which attracted approximately 800 U.S., Iraqi and other interested business representatives, increased the understanding of GOI officials and the Iraqi private sector regarding the regulatory expectations of serious international investors. A follow-on study tour provided the Iraqi provincial and local level investment officials the chance to interact with U.S. state and federal economic development officials, to discuss ways to create attractive investment climates at the local level.
Formed in accordance with the NIL of 2006, the National Investment Commission (NIC) and the Provincial Investment Commissions (PICs) are designed to be “one-stop shops” that can provide information, sign contracts, and facilitate registration for new foreign and domestic investors. The NIC and the PICs, however, are still works in progress. Investment Commissioners struggled with unclear lines of authority, budget restrictions, and the absence of regulations and standard operating procedures. An overall lack of legislative clarity regarding the NIL and the GOI’s relative lack of infrastructure coordination meant that the majority of the investments that have received NIC approval have yet to break ground.
Both the national government and the Kurdish Regional Government (KRG) 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.
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, along with the Central Bank’s monetary and exchange rate policies have continued to help temper inflation. The inflation rate has dropped from a high of 76.6 percent in August 2006 to -4.4 percent in December 2009 (negative due to decreased year-on-year oil, transportation, communication, clothing, and food prices).
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 (NIL) 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.” Elements of the GOI have taken issue with the NIL, and the Judiciary has not reviewed nor ruled on any cases concerning it to date. 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), and is considering, but has not signed nor 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 theoretically allows 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 lack of precedent and implementing regulations to the NIL continues to result in uncertainty regarding the application of the articles contained therein.
Right to Private Ownership and Establishment
Prior to the 2009 amendment to the National Investment Law, the NIL did not allow foreigners to own land. Some progress was made with the amendment, which would allow foreign interests to own land in Iraq for the express purpose of developing residential real estate projects, with the expectation that the projects would be sold back to Iraqis upon completion. Additionally, the amendment sought to clarify the land use aspect of the NIL, in which 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. 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. (The Central Organization on Standards and Quality Control (COSQC), an agency within the Ministry of Planning, handles the patent registry and the 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 regulations for the National Investment Law and its amendment makes uncertain the application of the law in practice. Once fully implemented, the law would establish a legal framework for investment. Potential investors, however, would likely still face significant hurdles regarding starting and operating a business in Iraq, given the complexity of Iraq's existing laws, regulations, and administrative procedures. Over 170 firms have filed for investment licenses in Iraq (more than doubling in the last few months of 2009), but few have moved to an execution phase. PICs have also been active in assisting regional investors. However, NIC and PIC Commissioners and their staff lack training and expertise, and are still building an effective “One-Stop Shop” for investors to ease their entrance into the Iraqi market. The U.S. government and other donors are sponsoring capacity development programs for 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 laws have been delayed and are still in the drafting stage. 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 evaluating this area.
The way in which the Iraqi government promulgates regulations can be opaque and lend itself to arbitrary use. Regulations imposing duties on citizens or private businesses are required to be published in the official government gazette. However, internal Ministerial regulations are not. This loophole allows bureaucrats to create internal requirements, procedures, or other “turnstiles” with little or no oversight, which can result in additional burdens for 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 Coalition Provisional Authority (CPA) Order No. 56 as a legal public entity that has financial and administrative independence. The Iraqi banking system includes seven state-owned banks, with the three largest (Rafidain Bank, Rasheed Bank, and Trade Bank of Iraq) accounting for about 96 percent of banking sector assets. There are also 36 privately owned banks licensed by the CBI (see CBI’s website – www.cbiraq.org). Eleven foreign banks either have licensed branches in Iraq or have strategic investments in Iraqi banks.
Although the volume of lending by privately owned banks is growing, many privately owned banks do more business providing wire transfers and other fee-based transaction services than lending. Businesses therefore largely self-finance or obtain credit from individuals in private transactions. Financial transfers from the government to provincial authorities or individuals, rather than business loans, are the major activity of the state-owned 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 through 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 USD 2 million to be processed through the TBI and distributed to private banks. The Finance Ministry is considering whether to raise 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). The NIL also allows foreign investors to form investment portfolios. Automation of the ISX was completed in 2009, and dematerialization of shares through the use of electronic bookkeeping instead of physical certificates is in progress. In addition, a new permanent securities law has largely completed the Constitutional review process and may be approved in 2010. Until the new law passes, an extension of previous regulations will secure the status of the Iraqi Securities Commission. Creation of an Irbil Stock Exchange (ISX) was announced in February 2010, but it is still in the process of formation and has not started operations.
Despite great improvements in 2009, Iraq can be a dangerous place. 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 strengthening as new Iraqi police units continue to be trained and deployed. Attacks against military and civilian targets throughout Iraq continue, including indirect fire attacks in the International Zone. In addition, planned and random killings have occurred, as well as extortions and kidnappings. U.S. citizens and other foreigners, as well as Iraqi officials and citizens, have been 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 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 Hussein'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. Undoing this legacy will be a long process, and investors still may have to contend with requests for bribes or kickbacks at all levels.
The Commission of 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. The COI investigates nationwide allegations of government corruption and refers cases to the Iraqi judiciary. The COI 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 while limited, is growing, and mainly involves the lower levels. The statutory and regulatory provisions intended to control corruption will require substantial revision to be consistently effective. Transparency International in its Corruption Perception Index (CPI) has ranked Iraq in a tie for 4th-to-last place.
Iraq signed and ratified the United Nations Convention against Corruption in March 2008 and has finalized a strategy to achieve compliance, a long-term endeavor. Iraq has also endorsed the World Bank’s Extractive Industry Transparency Initiative and is making progress in fulfilling the criteria for full membership.
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 the agreements is as all-encompassing as a U.S. Bilateral Investment Treaty (BIT). The agreements include arrangements on Investments Promotion and Protection (IPPA) within the Arab League, as well as arrangements with 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 on January 11, 1982.
On July 11, 2005, Iraq and the United States signed a Trade and Investment Framework Agreement (TIFA) as a first step toward increasing trade and investment cooperation between the two countries. 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 limited programs in Iraq on a temporary basis and only through a Congressional waiver of OPIC’s statutory IIA requirement. 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. In 2009, OPIC provided USD 50 million in funding for an American investor-led hotel project in Baghdad’s International Zone.
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. A more modern law drafted with the assistance of the International Labor Organization (ILO) has been under review in the Shura Council for some years and may be reported out soon to the Council of Ministers.
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 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 five 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.
Four geographic areas are currently 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 led by private master developers. Two other zones are in the discussion stage in the region: Erbil and Zakho. 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 capacity and is further inhibited by its control residing in the Ministry of Finance, which lacks specific focus on developing the FTZs.
Foreign Direct Investment Statistics
Over 170 firms have filed for investment licenses in Iraq (more than doubling in the last few months), but few of them have moved to an execution phase. Statistics on investment amounts issued by the National or Provincial Investment Commissions, or reported in the press, are relatively meaningless as they almost invariably report the intended or proposed investment amount for a given project. These figures are unreliable in estimating actual monies brought into Iraq and put to work.