2010 Investment Climate Statement - Iraq
Bureau of Economic, Energy and Business Affairs
Investor interest in Iraq has risen strongly since 2008, following substantial improvements in the security situation. In 2010, private sources estimate over USD 40 billion in new investments were announced, including private investment in some major infrastructure and housing construction projects. Potential investors are still concerned about security, 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 terrorism remained relatively low during 2010. Despite the prolonged political vacuum caused by the government-formation process for most of 2010, the Government of Iraq (GOI) and the Iraqi private sector continued to make incremental progress toward improving the business and investment climate. In particular, the GOI created a special commercial court in Baghdad for disputes involving foreign investors, with plans to create three more in Basrah, Mosul, and Karbala; and the GOI issued regulations intended to ease access to land for foreign investors, which has been a significant bottleneck to new projects.
The GOI has held three oil and gas licensing (“bid”) rounds since 2009, in which 44 foreign firms were allowed to bid for contracts to develop a significant portion of Iraq’s oil and gas resources. In 2010, the GOI held a symposium intended to attract investment into Iraq´s oil refineries, and auctioned rights to develop three natural gas fields. The awarded contracts could increase Iraqi production of crude oil five-fold over seven years, although internal infrastructure limitations and other factors will likely limit full realization of this potential. Iraq’s oil and gas licensing rounds in 2009 and 2010 were widely regarded as transparent and competitive. Additionally, the oil and gas 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 challenging, especially for small and medium investors. Potential investors should prepare themselves for significant security costs; cumbersome and confusing procedures for business visas and new business registration; long payment delays on some Iraqi government contracts; and sometimes unreliable, non-transparent or even non-existent dispute resolution mechanisms. Allegations of corruption are still endemic, and the legacy of central planning and inefficient state-owned enterprises continues to inhibit economic development. In its 2011 Doing Business Report, the World Bank ranked Iraq 166 out of 183 countries 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 2010 to improve its investment climate. The National Investment Law (NIL), originally passed in 2006, provides a baseline for a modern legal structure to protect foreign and domestic investors in addition to tax and other incentives. (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/.) An amendment to the NIL, passed in early 2010, 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. In December 2010, the GOI approved implementing regulations to the Amendment, which are intended to specify the conditions not only for ownership of land for housing but also for long-term leasing of land for other types of investment projects. As of early 2011, Iraqi authorities were in the process of interpreting these regulations and applying them to specific licensees. Many licensed investment projects remain stalled due to continuing confusion over land use at both the provincial and national levels.
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 struggle 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 many of the investments that have received NIC approval have yet to break ground.
The NIC, together with select PICs, have 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. A Department of Commerce-led Trade Mission of U.S. businesses to Iraq in October 2010 opened new opportunities for U.S. firms in Iraq and underscored the desire of Iraqi firms to partner with U.S. companies. Under the U.S.-Iraq Strategic Framework Agreement, U.S. and Iraqi officials continue to work together to identify and alleviate problems in Iraq’s business and investment climates. Individual governments and international organizations also manage numerous programs in support of private-sector development in Iraq, which cumulatively are laying the foundation for future growth.
In November 2010, Iraq’s Supreme Judicial Council established the First Commercial Court of Iraq, a court of specialized jurisdiction for disputes involving foreign investors that is part of a national strategy to improve Iraq’s investment climate. This court began hearing cases in January 2011. It has jurisdiction only over cases involving a foreign party in Baghdad province; Iraqi judicial officials have expressed interest in opening similar courts in Basrah, Mosul and Babil.
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) and its own Investment Commission. 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 applies.
Currency Conversion and Transfer Policies
The currency of Iraq is the Dinar (IQD - sometimes referred to as the New Iraqi Dinar). 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 maintain Iraqi bank accounts 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 CBI has brought inflation down from a peak of more than 70 percent in 2006 to below 10 percent since early 2008, primarily through appreciating the currency. Year-on-year inflation stayed below 4 percent in 2010.
Expropriation and Compensation
Article 23 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 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 or 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 yet 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 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 increases to fifteen years if Iraqi investors own more than fifty percent of the project; however, the lack of precedent or implementing regulations to the NIL continues to result in uncertainty regarding the application of the articles contained therein.
Right to Private Ownership and Establishment
Foreign investors in Iraq are able to own enterprises as well as investment portfolios in shares and securities.
Prior to the 2009 amendment to the National Investment Law, the NIL did not allow foreigners to own land. The amendment allows foreign interests to own land in Iraq for the express purpose of developing residential real estate projects. 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). In December 2010, the GOI approved implementing regulations to this amendment, in the form of a Prime Ministerial decree. The regulations allow investors to obtain land for residential housing projects with no initial down payment. The government instead is compensated by receiving a specified percentage of units built once the project is completed. The percentages are given in ranges that vary by location: urban center, provincial center, outside city limits, and so on. For non-residential, commercial investment projects--including agriculture, services, tourism, commercial, and industrial projects--the decree allows for leasing and allocation of government land, but not ownership. The terms and duration of these leases will vary, depending on the type of project and negotiations between the parties. Land for non-residential projects will be leased free of initial down payment, and compensation will be either a percentage of pre-tax revenue or a specified percentage of the “rent allowance” for the land- a figure determined by a formula specified in an earlier law. These smaller percentages of the “rent allowance” rate -– ranging from 1% to 25% -- amount to significant rent reductions for leased land, as specified by type of investment project in the decree. As of early 2011, Iraqi authorities are in the process of interpreting these regulations and applying them to specific licensees.
Protection of Intellectual 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 patent registry and the industrial design registry; the Ministry of Culture handles copyrights; and the Ministry of Industry and Minerals houses the office that registers 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:
--Paris Convention for the Protection of Industrial Property (1967 Act) ratified by Law No. 212 of 1975.
--World Intellectual Property Organizations (WIPO) Convention; ratified by Law No. 212 of 1975. Iraq became a member of the WIPO in January 1976.
--Arab Agreement for the Protection of Copyrights; ratified by Law No. 41 of 1985.
--Arab Intellectual Property Rights Treaty (Law No. 41 of 1985).
Transparency of the Regulatory System
The lack of clear and definitive implementing regulations for the National Investment Law and its amendment remains a source of delay and confusion in approving investment projects. 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 350 firms—both foreign and domestic—have filed for investment licenses in Iraq to date, not including over 300 in Iraqi Kurdistan, but fewer have moved to an execution phase. PICs have also been active in assisting regional investors. However, NIC and PIC Commissioners and their staff often lack training and expertise, and are still building an effective “One-Stop Shop” for investors to ease their entrance into the Iraqi market.
The absence of other laws in areas of interest to foreign investors also creates ambiguity. Iraq’s 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. A Competition law and a Consumer Protection law were passed in 2010; however, the Competition and Consumer Protection Commissions authorized by these laws have yet to be formed. Without these Commissions, investors do not have recourse against unfair business practices such as price-fixing by competitors, bid rigging, and abuse of dominant position in the market.
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 and 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 (LCs). In 2009, the Ministry of Finance (MOF) opened the government LC business by granting private banks permission to issue LCs below $4 million in size; however, private banks report that they have yet to receive any LCs over $2 million.
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 securities law has largely completed the Constitutional review process and may be approved in 2011. 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.
Competition from State-Owned Enterprises
Iraqi Ministries currently own and operate over 176 State-Owned Enterprises (SOEs), a legacy of the state-planning system of Iraq’s former regime. These firms employ over 700,000 Iraqis, many of whom are under-utilized. As a result of years of sanctions and war, most of these SOEs suffer from underinvestment or damage. Many of them are non-viable, although some have adapted and are producing goods—some with foreign partners. Many goods in Iraq, ranging from foodstuffs to apparel to light-industrial products, are imported—a result of both the poor state of Iraq’s industrial base and the opening of Iraq’s borders in 2003. As a result, the GOI proposed an increase in import tariffs in 2010, although this increase was postponed indefinitely in February 2011. In addition, the national budget in the past few years has contained a requirement that GOI Ministries, government entities, and provincial governments purchase their goods and contract services from SOEs owned by the Ministry of Industry and Minerals, though this provision is not normally observed.
In 2010, the Prime Minister approved a national policy of corporatization of Iraq’s SOEs, based on a “Road Map” derived from international best-practices. This program, which is likely to unfold over a period of up to ten years, will remove the surplus labor from the SOEs, help them develop business and investment plans, and gradually commercialize them in preparation for converting their ownership into shares. In addition to being a significant economic reform, this program, over the long term, may open additional opportunities for foreign investors. A handful of Iraqi SOEs already have foreign investors as partners; this number is expected to grow in the coming years.
The degree to which SOEs compete with private companies depends on the sector. For example, the Ministry of Communications has been pursuing a policy for many years to create a fourth, state-owned mobile operating company, to compete with the three existing private mobile operators. However, the Ministry of Electricity, in response to Iraq’s chronic power shortages, initiated in 2010 a policy of tendering Independent Power Producer projects (IPPs) , privately-owned power generating companies which will contribute to Iraq’s electricity grid along with the existing state-owned companies. The IPP initiative has the potential to attract significant investment.
Corporate Social Responsibility
Corporate social responsibility is a relatively unknown concept in Iraq. The international oil companies active in Iraq are required to observe international best practices in this area as part of their contracts with the GOI. As conditions improve, awareness of corporate social programs and responsibilities is likely to increase.
Despite great improvements since 2008, Iraq still 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.
While significant investment opportunities exist, particularly for sophisticated investors, corruption remains a significant problem in Iraq. The country was tied for 4th-to-last place in Transparency International’s 2010 Corruption Perceptions Index, and ranked 11th from last (out of 211 countries) in the World Bank’s 2009 Control of Corruption Index. Notably, it ranked in last place among Middle East countries on both indices.
Investors may have to contend with corruption in many forms in the country. With respect to government procurement, there are widespread and credible reports of bribery, kickbacks and awards to companies connected to political leaders. In some areas, investors may come under pressure to take on well-connected local partners to avoid bureaucratic hurdles to doing business. However, the government has been increasingly effective in reducing opportunities for corruption in a number of sectors, including large contracts for electricity generation and in awarding oil and gas concessions. Similarly, there are widespread reports of corruption involving government payrolls, ranging from “ghost” employees and salary skimming to nepotism and patronage in personnel decisions. Moving goods into and out of the country is difficult (Iraq ranks 179th out of 183 countries in “trading across borders” under the World Bank’s “Ease of Doing Business” report) and bribery to port officials to move goods appears to be common. In addition, Iraq needs to make major improvements in its anti money-laundering regime to meet FATF standards.
There are three principal institutions that are working to address the problem of corruption in Iraq. The Commission of Integrity (COI), established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for anti-corruption, law enforcement and crime prevention -- as well as public education on these topics. The COI investigates allegations of government corruption and refers cases to the Iraqi judiciary. The Board of Supreme Audit (BSA), established in the 1920’s, is an analogue to the U.S. Government’s General Accountability Office (GAO), and is responsible for auditing government accounts and overseeing public contracts. In addition, CPA Order 57 established inspectors general (IGs) for each of Iraq’s ministries. Similar to the role of IGs in the U.S. Government, these offices are responsible for inspections, audits and investigations within their ministries. Coordination among the three institutions is currently overseen by the Joint Anticorruption Council (JACC) which reports to the Council of Ministers, and a small office that advises the Prime Minister on anticorruption issues. Within the Council of Representatives, corruption issues are the primary responsibility of the Integrity Committee.
None of these institutions have effective jurisdiction in Iraq’s Kurdistan Region (IKR). The Kurdistan Regional Government (KRG) is currently merging two regional offices of the BSA into a regional Bureau of Supreme Audit, and has plans to establish a regional Commission of Integrity. The Kurdistan Regional Parliament has also established an integrity committee to promote anticorruption efforts in the region.
Iraq signed and ratified the United Nations Convention against Corruption in March 2008 and in March, 2010, unveiled a strategy to achieve compliance with the convention. The strategy, which is coordinated by the JACC, and under the supervising authority of the COI, includes a detailed 5-year action plan, addressing more than 200 specific areas. By the end of 2010, all Iraq’s ministries had submitted their individual plans to carry out the strategy, and most had begun implementation. Iraq is also a candidate country under the Extractive Industry Transparency Initiative (EITI) and has drafted an action plan towards fulfilling the criteria for full EITI membership.
While their capabilities have improved significantly in recent years, Iraq’s anti-corruption institutions are not yet powerful enough to fully address high level corruption in the country. The challenge is compounded by Article 136(b) of the Iraqi Criminal Procedures Code, which allows Ministers to shield Ministry employees from work-related prosecution for official acts. While it can serve as a legitimate shield against politically-driven prosecution, the provision has increasingly been used to block corruption investigations. The independence of the institutions has also been weakened by a failure of the government to seek COR confirmation of the appointment of key anti-corruption officials, which leaves many key officials in an acting capacity, and so subject to removal at any time by the Prime Minister. It remains to be seen how vigorously the new Iraqi Government will move to address these challenges.
Bilateral Investment Agreements and Regional Cooperation
Iraq is a signatory to some form of investor protection agreement or memorandum of understanding with thirty-five 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. In 2010, Iraq concluded BITs with France, Germany and Italy, although these treaties are still awaiting ratification by the Iraqi Council of Representatives. 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 and willingness to enforce them remains unknown.
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.
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. Even 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 $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) cleared the Shura Council in 2010 and is now awaiting Council of Representatives action.
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.
Under the law, 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. Although it is not currently operational, there is a project to rehabilitate it to its pre-2003 state. 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 being placed under the Ministry of Finance, which lacks specific focus on developing the FTZs.
Foreign Direct Investment Statistics
According to the National Investment Commission, over 350 firms have filed for investment licenses in Iraq, at both the national and provincial level--178 in 2010 alone, excluding Iraqi Kurdistan. The total value for these 178 investment licenses is approximately $10.5 billion; all but six were issued by PICs. These licenses were issued mainly to foreign companies, though in many cases there are Iraqi investors or capital along with the foreign partner. In the Kurdistan region, 107 licenses were granted in 2010 with a total potential value of $4.7 billion. Most of these licenses were granted to domestic Iraqi investors, often outside the Kurdistan region. Of these 107, seven were issued to foreign partners, with a total value of about $960 million.
However, the granting of a license by the NIC or a PIC does not guarantee that the proposed investment will be implemented. In many cases, it takes months or years for projects to materialize, if they do at all. In addition, press announcements of investment projects are relatively meaningless as they almost invariably report the intended or proposed investment amount for a given project. Both these figures are unreliable in estimating actual monies brought into Iraq and put to work.
2010 saw the approval of several large infrastructure contracts, such as a $4.6 billion contract to rehabilitate the port facility at Al Faw, and significant new contracts for residential housing construction-- a sector in which foreign investment is actively sought and supported by the GOI. Real estate remains the single largest area of foreign participation in Iraq’s economy, followed in differing degrees (depending on the region) by oil services, transportation infrastructure, electricity, and industry.