Attitude toward Foreign Direct Investment
The GOI has publicly stated its commitment to attract foreign investment, particularly given Iraq’s current fiscal challenges and the massive reconstruction needs in areas previously held by Da’esh. In December 2015 the GOI passed an amended National Investment Law (NIL) that improves investment terms for foreign investors, allows them to purchase land in Iraq for certain projects, and speeds up the investment license process. In 2015 Iraq also joined the Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID). Nevertheless, foreign investors continue to encounter bureaucratic challenges, corruption, and a weak banking sector. Recently, the GOI has been exploring financing options to pay for large-scale development projects rather than relying on the established practice of funding investments entirely from current annual budget outlays.
According to Iraqi law, a foreign investor is entitled to make investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, and the amount of foreign participation is not limited. However, Iraq’s NIL limits foreign direct and indirect ownership of most natural resources, particularly the extraction and processing of any natural resources. It does allow foreign ownership of land to be used for residential projects and co-ownership of land to be used for industrial projects when an Iraqi partner is participating.
Other Investment Policy Reviews
In the past three years, the GOI has not conducted any investment policy reviews through the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).
Laws/Regulations on Foreign Direct Investment
The NIL, amended in December 2015, provides a legal structure to protect foreign and domestic investors while also providing investment incentives. It allows both domestic and foreign investors to qualify for investment incentives equally; however, tax exemption periods are longer if the project is over 50 percent Iraqi-owned. A 2015 amendment to the NIL allows foreign ownership of land for the purpose of developing residential real estate projects. For industrial projects, foreign ownership of land is allowed if jointly owned by an Iraqi partner. Although the NIL was meant to clarify and codify investment regulations, the lack of clear and definitive implementing mechanisms creates confusion and delays in the approval of investment projects. Furthermore, the NIL does not absolve any investor from fully adhering to the requirements and mechanisms of other laws, as well as any legal requirement applicable under Iraqi law as a whole. (A copy of the amended 2015 NIL can be obtained from the National Investment Commission website http://investpromo.gov.iq/policies-and-laws/).
Under the NIL, 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 offers investor facilitation services on transactions including work permit applications, customs procedures, and business registration. Investors can request these services through the NIC website. However, Investment Commissions struggle to operate amid unclear lines of authority, budget restrictions, and an absence of regulations and standard operating procedures. The Investment Commissions still generally lack the authority to intercede when investors encounter bureaucratic obstacles with other Iraqi ministries.
The NIL does not apply to investment in the IKR. Under the Iraqi Constitution, some issues relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Currently, the IKR, comprising four northern provinces, is the only area of Iraq with a designation as a region. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (KRIL) of 2006 and the Kurdistan Board of Investment (KBOI), which is designed to provide incentives to help economic development in areas under the authority of the Kurdistan Regional Government (KRG).
The KRIL provides specific incentives for companies to develop strategic investment projects, which the KBOI evaluates and licenses based on the project’s perceived economic and environmental impacts. If approved, a company is awarded an investment license that could include free land, a ten-year exemption from corporate taxes, and a five-year exemption from customs duties. The KBOI has approved over 750 projects since 2006. Investors who do not wish to receive the incentives for their projects under the investment law may invest without applying for the investment license by working directly with the relevant sector’s ministry.
A copy of the IKR Investment Law can be obtained from the KBOI website: http://www.kurdistaninvestment.org/docs/Investment%20Law.pdf.
In 2008, the Provincial Powers Law (Law Number 21) was adopted to decentralize governance by delineating substantial financial and administrative powers for provincial (governorate) councils. Under the 2008 law, the provincial councils enact provincial legislation, regulations, and procedures, and choose the province’s governor and two deputy governors. Governors’ offices are in charge of drafting provincial budgets and implementing federal policies. June 2013 amendments to this law mandated an increase in “petrodollar” allocations for oil and gas producing provinces as well as the establishment of budgetary instruments to give all provinces greater control of spending and revenue generation in their provinces. As a consequence of this law and subsequent amendments, all provinces would administer larger budgets and issue their own procurement tenders. In 2014 and 2015, low oil prices and scarce budget resources led to uncertain and limited “petrodollar” disbursements to provinces, thereby constraining planned infrastructure spending. Sustained political opposition by some federal ministries has prevented complete implementation of this law, including the budgetary measures that would give provinces greater financial control.
A list of Iraqi laws relevant to the Investment Process is included in “A Legal Guide to Investing in Iraq”, a collaboration between the U.S. Department of Commerce’s Commercial Law Development Program (CLDP) and the National Investment Commission (NIC): http://cldp.doc.gov/programs/cldp-in-action/details/1551
Foreign investors interested in establishing an office in Iraq or bidding on a public tender are required to register as a foreign business with the Ministry of Trade’s Companies Registration Department. Investors that will do business only in the IKR can register with the IKR directly. Companies that will do business in both the IKR and greater Iraq must register with the Ministry of Trade.
In order to incorporate a company in Iraq, an investor must obtain a statement from an Iraqi bank showing a minimum capital deposit. A foreign investor will also apply for an investment license from the appropriate national, regional or provincial investment commission. Companies are required to register with the General Commission for Taxation and register employees for social security (if applicable). Additional information is available at the National Investment Commission’s website: http://investpromo.gov.iq/ Companies that provide security are also required to register with the Ministry of the Interior. The steps required to register a company may be time consuming.
The National Investment Commission does not exclude businesses from taking advantage of their services based on the number of employees or the size of the investment project. The National Investment Commission can also connect investments by micro, small, and medium-sized enterprises (MSMEs) with the appropriate provincial investment council.
The Kurdistan Board of Investment (KIB) manages a streamlined investment licensing process in the IKR that assures an official response within 45 days of the initial license application. Despite bureaucratic hurdles, on the whole the KIB investment framework seems to work well. Because of overheated commercial and residential real estate markets, the KIB has moved away from approving licenses in these sectors. Businesses report some difficulties establishing local connections, obtaining qualified staff, and meeting import regulations. However, the KIB receives high marks for being helpful in resolving problems.
National Investment Commission: http://investpromo.gov.iq/
In August 2015, the GOI announced a $4.5 billion USD lending program funded by the Iraqi Central Bank to promote development in the industrial, agricultural, and housing sectors. The program, which has not begun large-scale lending, plans to disseminate funds to specialized banks: 33 percent to the Industrial Bank, 33 percent to the Agriculture Bank, 17 percent to the Real Estate Bank, and 17 percent Housing Bank. The program plans to offer a five-year renewable credit to investors.
Traditionally, investment in Iraq has gone to energy-related projects. Article 111 of the Constitution states that Iraq’s oil belongs to the people of Iraq, therefore all international oil companies operate through technical services contracts (TSC). The current fiscal crisis has prompted the GOI to consider renegotiating international oil companies’ (IOC) contract terms, but a wholesale change to more profitable production sharing contracts has not occurred. Iraq has 143 billion barrels of proven oil reserves, the second-largest in OPEC, and oil production has reached the highest level in 35 years. Despite growing oil production capacity, inadequate infrastructure limiting storage and pumping capacity constrains Iraq’s oil export potential.
Since 2009, the GOI has held four oil and gas licensing (“bid”) rounds. Foreign firms were allowed to bid for contracts to develop a significant portion of Iraq’s oil and gas resources. Iraq has the potential to dramatically increase its production of crude oil, but internal infrastructure constraints and other factors have limited the full realization of Iraq’s potential. Iraq’s four oil and gas bid rounds were widely regarded as transparent. The first and second oil and gas licensing rounds in 2009 and 2010 were competitive, offering oil fields that were already producing oil or had proven reserves. However, the third and fourth rounds in 2011 and 2012, which focused on largely unexplored oil and gas fields, yielded far fewer contracts, due to contract terms deemed insufficient to incentivize riskier investments. Iraqi oil officials concede the need to offer better terms in future rounds, but they have not specified how contract terms might change. Iraq has also not initiated the fifth and sixth bid rounds given current security challenges in Anbar Province and budgetary constraints. The oil and gas contracts awarded to date are expected to bring in billions of dollars of investment in oil and gas-related industries and spur growth in the foreign and domestic private sector in Iraq.
Under Prime Minister Abadi, the GOI is newly committed to diversifying its economy away from reliance on oil and is seeking foreign investment in non-oil related sectors. The government is particularly interested in attracting assistance and loans from foreign financial institutions. Investment opportunities are supposed to be disseminated through the Ministries’ websites and Commercial Attaché offices. Many investment opportunities are published on the National Investment Commission’s website: http://investpromo.gov.iq/
Limits on Foreign Control and Right to Private Ownership and Establishment
According to the National Investment Regulation No. 2 of 2009, if an investment license is granted to a project, at least 50 percent of the project’s workers must be Iraqi nationals. The amended NIL also states that investors should give priority to Iraqi citizens before hiring non-Iraqi workers. As a result of popular protests in the summer of 2015, the GOI has applied pressure on foreign companies to hire more local employees. In order to generate non-oil revenues, the GOI has also encouraged foreign companies to partner with local industries and purchase Iraqi-made products. Under the NIL, investors who have obtained an investment license should be allowed to enjoy exemptions from taxes and fees for a specific time period, although those exemptions are not universally recognized. The GOI generally favors SOEs and state-controlled banks in competitions for government tenders and investment. This preference discriminates against both local and foreign investors.
The GOI has repeatedly announced that it plans to reorganize failing SOEs across multiple sectors. Additionally, the GOI is eager to modernize Iraq’s financial and banking institutions. There are, however, no concrete timelines for these initiatives. Presumably, foreign investors would have an opportunity to invest in privatization projects.
Screening of FDI
According to the NIL, the GOI reserves the right to screen foreign direct investment. The U.S. Department of State is not aware of instances where this screening process has impeded foreign investments in Iraq. Several GOI Ministries, including the Ministry of Health and the Ministry of Planning, occasionally require potential investors to fill out Arab League Boycott (ALB) questionnaires, which the Iraqi Government has officially discontinued. This prevents certain investments by U.S. companies.
The Council of Representatives passed a Competition Law and a Consumer Protection Law in 2010. However, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed. The NIL is supposed to promote fair competition and “competitive capacities” in the local market. However, the NIL does not include specific competition legislation. The prominent role of SOEs in Iraq and corruption further undermine the competitive landscape.