2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report

Openness to Foreign Investment

Investors in Iraq face both tremendous opportunities and significant challenges. After decades of oil-driven statist economic policy, followed by years of conflict and instability, the Government of Iraq (GOI) seeks to identify and promote policies to strengthen the country’s small private sector, create jobs for its citizens, and spur economic development. Owing to increased petroleum production for export, Iraq’s economy grew by approximately 10 percent in 2012, as it did the prior year, making it one of the fastest growing economies in the world. Iraq has 143 billion barrels of proven oil reserves, the second-largest in OPEC, and oil exports now stand at their highest level in 30 years. While oil generated over 90 percent of government revenue in 2011, the petroleum sector accounts for only one percent of Iraqi employment. The GOI is seeking to diversify Iraq’s economy to create jobs for its labor force. Official statistics place unemployment at around 17 percent, but the actual rate is likely much higher, factoring in underemployment and discouraged job seekers.

Potential investors remain concerned about security, but are now more likely to cite regulatory hindrances, difficulties working out financing arrangements, and other practical barriers to doing business ranging from corruption to bureaucratic red tape to electric power shortages. Sectarian violence and acts of terrorism continued in 2012, but in lower numbers than during the 2009-2010 period. In 2011, foreign firms and investors reported over $55 billion in investments, service contracts, and other commercial activities across Iraq, according to private consultants. This activity amounted to an increase of 80.4 percent over 2010, while total deal value increased by 40.3 percent. The International Trade Centre (ITC) – a joint venture of the United Nations and the World Trade Organization (http://www.intracen.org/country/iraq) – estimated that Iraq attracted over $1.6 billion of foreign direct investment (FDI) inflows in 2011 (the most recent statistics available), representing an increase of approximately 52 percent since 2007.

The lion’s share of investment has gone to energy related projects. The GOI has held four oil and gas licensing (“bid”) rounds since 2009, in which foreign firms were allowed to bid for contracts to develop a significant portion of Iraq’s oil and gas resources. A planned fifth bid round (for gas fields only) is expected in 2013. Iraqi production of crude oil may increase dramatically over the next ten years, although internal infrastructure constraints and other factors may limit full realization of Iraq’s potential. Iraq’s oil and gas licensing rounds in 2009 and 2010 were widely regarded as transparent and competitive; the 2011 round, however, attracted fewer bidders and resulted in the award of only four of twelve blocks. The government has publicly recognized the need to offer better terms in future rounds, but has not specified what terms might change. The oil and gas contracts awarded are expected to bring in billions of dollars of investment in oil and gas-related industries going forward and spur growth in the foreign and domestic private sector in Iraq.

Despite positive developments throughout Iraq, the overall investment climate remained challenging, especially for small- and medium-sized firms and investors. Potential investors should prepare to face significant costs to ensure security, cumbersome and confusing procedures for business visas and new business registration, long payment delays on some GOI contracts, and dispute resolution mechanisms that are neither reliable nor transparent. Delays at customs are another common complaint of businesses. Though the Iraqi population is expected to reach 40 million in the next 15 years, skilled human resource capacity remains limited due to emigration of many former educated Iraqis and low rates of higher education. Allegations of corruption are still widespread, and the legacy of central planning and inefficient state owned enterprises continues to inhibit economic development. In Doing Business 2013: Making A Difference for Entrepreneurs, the World Bank ranked Iraq 165 out of 185 countries in its overall “ease of doing business” category. Transparency International ranked Iraq 169 out of 176 in its 2012 Corruption Perception Index (representing little change from its score of 175 out of 182 the previous year). The Heritage Foundation did not rank Iraq in its 2013 Economic Freedom Index.

Efforts to address many of these impediments to doing business will be undertaken by the United States government and the GOI through the bilateral dialogue mechanism provided under the U.S.-Iraq Strategic Framework Agreement, which established Joint Coordination Committees (JCCs) in a number of areas of mutual interest. The economic-related JCCs are 1) Energy; 2) Services, Technology, Environment and Transportation; and 3) Trade and Finance. The Energy JCC met in 2012, and the Services, Technology, Environment and Transportation JCC met for the first time in November 2012. In addition, the USG continues to assist the GOI through many capacity-building programs intended to strengthen private sector development and create an enabling environment for investment.

Under the Iraqi Constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to the regions. Investment in the Iraqi Kurdistan Region (IKR) operates within the framework of the Kurdistan Region Investment Law (KRIL) (Law 4 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). In the sections that follow, this statement takes note of important differences between the investment climate in the IKR and rest of Iraq.

Investors in the IKR face many of the same challenges as investors elsewhere in Iraq, including corruption, red tape, and inefficiency, but a business-friendly investor law and generally stable security situation continue to attract foreign businesses. Foreign and domestic investment in the IKR has been rising annually for the last six years, with over 500 major projects valued at almost $25 billion awarded under the KRIL since 2006 and $6 billion in investment projects awarded in 2012 alone. The KRIL applies only to non-oil and gas projects.

Since passing its own Kurdistan Oil and Gas Law of 2007, the KRG has directly signed about 50 contracts to develop IKR energy reserves. The federal government has disputed the legal authority of the KRG to conclude most of these contracts, some of which are also in areas with unresolved administrative boundaries in dispute between the federal and regional government. Political blocs within the federal government have been unable to agree on comprehensive hydrocarbons legislation to address these issues. It is the position of the USG that signing contracts for oil exploration or production with any region of Iraq, without approval from federal Iraqi authorities, exposes companies to potential legal and financial risks.

In sum, investors looking to enter Iraq face the potential of much to gain but they should also be cognizant of the constraints on business activity and other barriers to investment that currently exist and will persist in the short- to medium-term as Iraq transitions to a market economy with a more diverse and broad private sector base.

The GOI has publicly stated its commitment to attract foreign investment and has taken several steps 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 providing 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 barrier to attracting foreign investment. In December 2010, the GOI approved implementing regulations to the Amendment that 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 2013, Iraqi authorities were still 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.

The GOI has continued to work on revising the investment law to create a better investment climate and is currently considering further amendments to the 2006 NIL. It is expected that the new amendments will provide greater clarity relating to land rights, transfer for ownership, and issuing regulations, as well as outline the creation of a technical department within the NIC.

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. In reality, however, the NIC and the PICs remain works in progress. Investment Commissioners struggle to operate with unclear lines of authority, budget restrictions, and the absence of regulations and standard operating procedures, compounded by a lack of staff familiar with prevailing practices in international business. An overall lack of legislative clarity regarding the NIL and mechanisms to ensure interagency coordination under the GOI has resulted in many of the investments that have received NIC approval still waiting to break ground.

The NIC, together with select PICs, have participated in several international conferences intended to attract investors to Iraq. 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. In November 2012, the U.S. pavilion at the Baghdad International Fair featured over 35 organizations, including 24 companies and seven universities. 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 some of the foundation for future growth.

The NIL does not apply to investment in the IKR, which is regulated by its own investment law (Law 4 of 2006) and the KBOI. The law provides specific incentives for companies to develop strategic investment projects, which the KBOI evaluates and awards 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. (A copy of the IKR Investment Law can be obtained from the KBOI website – http://www.kurdistaninvestment.org/docs/Investment%20Law.pdf ). Over 500 projects have been approved 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 ministry.

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 U.S. 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 of Iraq’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. The CBI has held the official exchange rate at close to 1,170 IQD/1.00 USD since 2009.

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 specific 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.

Dispute Settlement

During decades of war and sanctions, Iraqi courts became isolated from developments in international commercial transactions. In recent years, however, trade with foreign parties has played a more significant role in Iraq’s economic growth and Iraqi courts are beginning to see a significant increase in complex commercial transactions. In direct response, the Iraqi judiciary has specifically requested specialized training for its trial and appellate court judges in the area of international sales contracts, commercial court procedure and litigation, international arbitration, intellectual property and documentary credit to ensure consistency and predictability for foreign companies in the Iraqi legal environment. The U.S. Department of Commerce’s Commercial Law Development Program (CLDP) is conducting a multi-phase judicial development effort to support Iraq’s commercial courts, which has featured seven in-depth workshops for nearly 100 judges from across Iraq’s different provinces in all of the requested program areas. CLDP’s workshops are also used as the Iraqi judiciary’s primary tool to select and prepare judges for the country’s new commercial courts. CLDP will continue to develop and implement workshops on similar topics and new topics that are identified based on the needs of the Iraqi courts.

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. The court has received over 500 cases since its establishment. Over 350 of these cases have been adjudicated, many in as few as 30 days since the judges are able to give their full attention to these cases. This record stands in stark contrast to general jurisdiction trial courts that receive up to 30 cases per day and do not give priority to commercial cases, thereby causing commercial cases to be delayed for months or years before a resolution is achieved. Iraqi judicial officials have since created two additional commercial courts in Najaf and Basrah. Given that all of Iraq’s ministries are located in the capital, and the vast majority of commercial cases involve a foreign party and an Iraqi government agency, the Baghdad Commercial Court reviews far more commercial cases than the general jurisdiction courts in the surrounding provinces. Please see also discussion of the Westinghouse Case decided in 2012 under Protection of Intellectual Property Rights below.

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. In the IKR, if the KBOI determines that investors are using land awarded under investment licenses for purposes other than those outlined in the license, it can impose fines and potentially confiscate the land. Article 17 of the region’s investment law outlines an investor’s arbitration rights.

Domestic arbitration is provided for in Articles 251-276 of the Iraqi Civil Procedure Code, which require arbitration agreements to be in writing. These Articles also apply to the IKR. 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 50 percent of the project; however, the lack of precedent or implementing regulations to the NIL results in continuing uncertainty regarding the application of the articles contained therein.

Under the IKR’s investment law, foreign and national investors are treated equally and are eligible for the same benefits. Foreign investors may choose to invest in the Kurdistan Region with or without local partners, and full repatriation of profits is allowed. While investors have the right to employ foreign employees in their projects, priority is given to awarding projects that employ a high share of local staff and ensure a high degree of knowledge transfer. Additionally, the law allows an investor to transfer his investment totally or partially to another foreign investor with the approval of the KBOI.

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 one to 25 percent -- amount to significant rent reductions for leased land, as specified by type of investment project in the decree. Iraqi authorities are still in the process of interpreting these regulations and applying them to specific licensees.

In the IKR, foreign land ownership is allowed under Law 4 of 2006. The KBOI initially awarded over half of all investment licenses to housing projects, though the lack of a clear sector strategy and speculation in housing properties prompted the board to freeze all new investment licenses issued in the sector by mid 2012. Investment licenses that include land ownership are more likely to be issued in the KBOI’s priority sector development areas of tourism, agriculture, and industry.

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 patents, trademarks, and copyrights. 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 would 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.

The USG is continuing efforts to bolster understanding of intellectual property rights and build GOI capacity to protect them. In June 2012, the Federal Court of Cassation, the highest civil court in Iraq, upheld a finding by the Baghdad Commercial Court that ruled in favor of U.S. firm Westinghouse in a trademark dispute, setting a positive precedent for IPR protection in Iraq. The Commercial Court has jurisdiction over commercial disputes that involve at least one foreign party and disputes over various commerce-related issues including trade, real estate, banking, trademarks and intellectual property, transportation, and other areas. It was established in November 2010 under the Higher Judicial Council (HJC) with the assistance of the Commercial Law Development Program, which provided technical assistance and training to Iraqi judges who serve on the court.

Iraq is a signatory to several international intellectual property conventions and to regional or bilateral arrangements, which include: 1)Paris Convention for the Protection of Industrial Property (1967 Act), ratified by Law No. 212 of 1975; 2) World Intellectual Property Organizations (WIPO) Convention, ratified by Law No. 212 of 1975. Iraq became a member of the WIPO in January 1976; 3) Arab Agreement for the Protection of Copyrights, ratified by Law No. 41 of 1985; and 4) 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 the approval of investment projects. Once fully implemented, the law would establish a legal framework for investment. Potential investors, however, would likely still face laws, regulations, and administrative procedures that continue to make Iraq’s overall regulatory environment relatively opaque. Over 950 firms—both foreign and domestic—have filed for investment licenses in Iraq to date, 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 their operations to serve as effective “One-Stop Shops” 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. 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. Without these Commissions, investors do not have recourse against unfair business practices such as price-fixing by competitors, bid rigging, or abuse of dominant position in the market. In the IKR, the KRG implemented the Consumer Protection Law by passing Law 9 of 2010.

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, there is no corresponding requirement for the publication of internal ministerial regulations. 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 reorganized by Coalition Provisional Authority (CPA) Order No. 56 as a legal public entity possessing 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 34 privately owned banks licensed by the CBI (see CBI’s website http://www.cbi.iq/index.php?pid=IraqFinancialInst). Eleven foreign banks either have licensed branches in Iraq or have strategic investments in Iraqi banks. The removal of CBI Governor Shabibi and arrest of CBI employees for alleged corruption in October 2012 raised concerns in the international community about CBI independence.

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, represent 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 by the end of 2010 all companies listed on the ISX were being traded electronically. In addition, a new securities law has largely completed the Constitutional review process but has not yet been passed by the Iraqi government. Until the new law passes, an extension of previous regulations will secure the status of the Iraqi Securities Commission. Creation of an Erbil Stock Exchange (ESX) was announced in February 2010, and is expected to begin operation in 2013. The ESX plans to list companies from all regions of Iraq.

Competition from State-Owned Enterprises

GOI ministries currently own and operate over 192 State-Owned Enterprises (SOEs), a legacy of the state planning system of Iraq’s former regime. These firms employ over 800,000 Iraqis, many of whom are underutilized. As a result of years of sanctions and war, most of these SOEs suffer from underinvestment or actual physical damage. Many of them are non-viable economically, although some have adapted and are producing goods, including several with foreign partners. Iraq imports many goods—ranging from foodstuffs to apparel to light-industrial products—a result of both the deterioration of Iraq’s industrial base and the opening of Iraq’s borders in 2003.

In 2010, the Prime Minister approved a national policy of corporatization of SOEs based on a “Road Map” derived from international best-practices, but implementation has been slow-going. Selected SOEs under the Ministry of Industry and Minerals (MIM) are participating in a pilot project under this plan to help them develop business and investment plans, remove the surplus labor from the SOEs, develop corporate governance structures, and form international strategic partnerships (ISPs) with the goal of eventually becoming commercially viable entities. The Ministry of Finance is also setting up an Asset Valuation Unit, a step that is necessary to attract private and/or foreign investors. A handful of Iraqi SOEs already have foreign investors as partners; this number is expected to grow in the coming years.

While few SOEs compete with Iraq’s private-sector companies, most SOEs now face increasing competition from foreign firms, most of which are privately-owned, as a result of the opening of Iraq’s market. Faced with this competition, Iraq’s SOEs are losing market share in certain sectors open to competition because their equipment and production technology are obsolete. As a result, an increasing number of Iraqi SOEs is attempting to form strategic partnerships with foreign firms to obtain newer technology, investment, and managerial expertise. Several such partnerships have already materialized, because foreign firms interested in entering the Iraqi market see SOEs as desirable partners; SOEs usually have a well-known brand, long-established distribution channels, and priority access to GOI procurement. Iraq’s MIM is the ministry that oversees the largest number of Iraqi SOEs. Having had little success at privatizing these SOEs, MIM now views strategic partnerships between foreign firms and its SOEs as a more limited, but more certain, way for the latter to acquire the technology, investment, and managerial expertise they require to succeed.

The degree to which SOEs compete with private companies varies by sector. For example, the Ministry of Communications (MOC) has been pursuing a policy since 2007 to give a mobile telecommunications license to the Iraq Telecommunications and Postal Company (ITPC), a MOC SOE, so that it could compete with the three existing private mobile operators ostensibly to improve competition in a market of 27 million subscribers and growing. The ITPC’s stagnant landline voice service, however, stands in marked contrast to the success of the private mobile operators as the ITPC is estimated to have fewer than one million customers while employing more than 22,000 Iraqis. Moreover, the company has made little progress in deploying broadband data networks for residences or businesses. If the ITPC were to receive a mobile license, the MOC’s regulatory policies and the ITPC’s monopoly over the fiber optic network and international gateways almost certainly would give the firm an unfair advantage over its private competitors and stymie the growth of Iraq’s telecommunications sector.

Corporate Social Responsibility

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 beyond the oil sector.

Political Violence

Some regions within Iraq have experienced more violent incidents than others in recent years, and violence and threats against U.S. citizens persist. Despite the general decline in terrorist-related violence directed against USG facilities or personnel, threats of attack against U.S. citizens in Iraq continue and U.S. citizens in Iraq remain at risk for kidnapping. Methods of attack in the past have included roadside improvised explosive devices (IEDs), including explosively formed penetrators (EFPs); magnetic IEDs placed on vehicles; human and vehicle-borne IEDs; mines placed on or concealed near roads; mortars and rockets, and shootings using various direct fire weapons. Numerous insurgent groups, including Al Qaida in Iraq, remain active throughout the country. Although Iraqi Security Forces (ISF) operations against these groups continue, terrorist activity persists in many areas of the country. While sectarian and terrorist violence occurs at levels lower than in previous years, it occurs often, particularly in the provinces of Baghdad, Kirkuk, Ninewa, Salah ad Din, Anbar, and Diyala.

The security situation in the Iraqi Kurdistan Region (IKR), which includes the provinces of Sulaimaniyah, Erbil, and Dahuk, has been more stable relative to the rest of Iraq in recent years, and the region has experienced fewer terrorist attacks and lower levels of violence, but threats remain. U.S. government personnel in the IKR are required to be accompanied by a protective security detail when traveling outside of secure facilities. Increasingly, many U.S. and third-country business people travel throughout many parts of Iraq; however, they do so under restricted movement conditions and almost always with security advisors and teams.

The Turkish military continues to carry out operations in northern Iraq against elements of the Kongra-Gel terrorist group (formerly Kurdistan Workers' Party or PKK). Additionally, extensive unmarked minefields remain along the same border. The Government of Iran also sometimes carries out military operations against armed groups in the mountain regions along the Iraq-Iran border. These operations have included troop movements as well as both aerial and artillery bombardments. U.S. citizens should avoid areas near the Turkish or Iranian borders because of these ongoing military operations. Borders in these areas are not always clearly defined. In 2009, three U.S. citizens were detained by Iranian authorities while hiking in the vicinity of the Iranian border in the Kurdistan region. The resources available to the U.S. Embassy to assist U.S. citizens who venture close to or cross the border with Iran are extremely limited. The Department of State cautions U.S. citizens to avoid travel in close proximity to the Iranian border.

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.

Corruption

While large-scale investment opportunities exist in Iraq, particularly for sophisticated investors, corruption remains a significant impediment to conducting business, and investors can expect to contend with it in many forms. While the GOI has moved toward greater effectiveness in reducing opportunities for procurement corruption in sectors such as electricity, oil, and gas, credible reports of corruption in government procurement are widespread, with examples ranging from bribery and kickbacks to awards involving companies connected to political leaders. Investors may come under pressure to take on well-connected local partners to avoid systemic bureaucratic hurdles to doing business. 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 continues to be difficult and bribery of port officials is reportedly common (Iraq ranks 179th out of 185 countries in “trading across borders” in the World Bank’s 2013 Doing Business report). Iraq ranked eight places from the bottom in Transparency International’s 2012 Corruption Perceptions Index, improving four spots since 2011. Iraq also ranked in the eighth percentile of the World Bank’s 2012 Control of Corruption Index. Notably, Iraq came in last place among Middle East countries on both indices. In view of the conflict and sanctions Iraq has endured over recent decades, the resulting breakdown in institutional effectiveness that would curb high levels of corruption is not surprising. The USG is implementing several programs to address corruption at the institutional level, with some positive impact.

There are three principal institutions specifically designated to address the problem of corruption in Iraq. 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. The Commission of Integrity (COI), initially established under the Coalition Provisional Authority (CPA), is an independent government agency responsible for pursuing anti-corruption investigations, upholding enforcement of laws and preventing crime. The COI investigates government corruption allegations and refers completed cases to the Iraqi judiciary. Paragraph one, Article 61, and paragraph three, article 73 of the Iraqi Constitution were the authorities referenced for updating the CPA provisions in COI Law No. 30, passed in 2011. Law No. 30 grants the COI broader responsibilities and jurisdiction through three newly created Directorates: Asset recovery, Research and Studies, and the Anti- Corruption Academy.

The Board of Supreme Audit (BSA), established in 1927, is an analogue to the U.S. Government’s General Accountability Office (GAO). It is a financially and administratively independent body that derives its authority from Law 31 of 2011 – The Law of the Board of Supreme Audit. It is charged with fiscal and regulatory oversight of all publicly funded bodies in Iraq. In October 2012, several amendments to the BSA’s authorizing legislation, including a name change to the “Federal Board of Supreme Audit” (FBSA), gave it jurisdiction over audits of all federal revenues, including any revenues received from the IKR. Neither the COI nor the IGs have effective jurisdiction within the IKR. Regional revenues are audited by the Kurdistan Board of Supreme Audit with KRG Parliament oversight. The KRG passed the Commission on Public Integrity (Law No. 3 of 2011), which established a regional Commission of Integrity that has yet to be staffed. The KRG Parliament has also established an integrity committee to promote anticorruption efforts in the region, but during 2012 the committee’s chairman and three of the other seven members resigned and had not been replaced at the time of publication of this statement.

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. Of note, the JACC was instrumental in drafting the GOI’s National Anti-Corruption Strategy for 2010-2014, which is designed to guide all three anti-corruption institutions and be used as an effective tool in preventing, deterring, and counteracting corruption at all levels. The strategy is part of Iraq’s response as a signatory to the UN Convention Against Corruption (UNCAC), to which Iraq acceded in 2007. As part of JACC, the COI developed this high-level strategy, which is the first of its type in Iraqi history.

Iraq signed and ratified the UNCAC in March 2008 and in March 2010 unveiled a strategy to achieve compliance with the convention. The strategy, which was coordinated by the JACC and under the supervising authority of the COI, included a detailed, five-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. The UN Office of Drugs and Crime (UNODC) has submitted a concept paper for consideration for further funding in building on Iraq’s work to date to become UNCAC compliant. Regarding Iraq’s application for membership in the Extractive Industry Transparency Initiative (EITI), as of December 12, 2012, the country was accepted as a member, having been found compliant with EITI requirements. The Board did, however, stipulate that the GOI should include oil and gas production in the Kurdistan Region as well as sales revenue to the KRG.

Failure of the GOI to seek Council of Representatives (COR) confirmation of key anti-corruption appointments, however, has undermined the independence of Iraq’s principal institutions to combat corruption. The result has been that many high-level officials operate in an acting capacity and are thus subject to removal at any time by the Prime Minister. While the GOI has made progress in some areas, it remains to be seen how vigorously the Government will move to address the problem of corruption system-wide. Article 136(b), which allowed Ministers to shield Ministry employees from work-related prosecution for official acts, was abolished on November 14, 2011. While such a provision could serve as a legitimate shield against politically-driven prosecution, the provision had increasingly been used to block corruption investigations at higher levels within the GOI.

Iraq’s existing Anti-Money Laundering/Counter Terrorism Financing (AML/CTF) regime is completely inadequate. The country’s financial system needs a major overhaul of its anti-money laundering regime to meet the Middle East North Africa Financial Action Task Force (MENAFATF) standards. Iraq joined MENAFATF in 2005 and underwent its first ever Mutual Evaluation (ME) in 2012. The ME team was led by World Bank experts early in 2012 to determine if the GOI conformed to the international standards stated in the 40-plus-9 recommendations issued by FATF; the Mutual Evaluation Report (MER) on Iraq was provided to the GOI in June. Although Iraq was found non-compliant in 35 of the 40 categories, the GOI delegation was forthright in admitting its deficiencies and given one year (until November 2013) to make needed corrections before referral to the International Cooperative Review Group (ICRG). During the plenary, the GOI delegation highlighted several accomplishments signifying Iraq’s determination to work toward meeting MENAFATF goals: the establishment of a major Financial Crimes Task Force (FCTF) consisting of members from agency and ministerial bodies with AML/CTF law enforcement authority – the first such operational body in the Middle East; an increasingly effective Financial Intelligence Unit (FIU) under the Central Bank; and a commitment to push through new Anti-Money Laundering/Counter-Terrorism Financing legislation that conforms more closely to international standards.

Bilateral Investment Agreements and Regional Cooperation

Iraq is a signatory to some form of investor protection agreement or memorandum of understanding with 35 bilateral partners and nine multilateral groupings. However, none of these 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; the BITs with France and Germany were ratified by the Iraqi Council of Representatives in 2012, while the BIT with Italy has yet to be ratified. 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 such provisions remains unknown.

In addition, Iraq has bilateral free trade (FTA) agreements with the following 11 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.

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 Government of Iraq ratified the agreement in December 2012.

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, and the government ratified the agreement in December 2012. Even without the IIA, OPIC has been able to offer limited programs in Iraq on a temporary basis through a Congressional waiver of OPIC’s statutory IIA requirement. Some of OPIC's basic programs have included structured finance projects, political risk insurance, investment funds and financing for small and medium-sized enterprises, and a planned mortgage pilot program.

Labor

Iraqi labor law remains weak. While it provides for workers’ rights, including freedom of association and the right to collective bargaining, these rights are not respected in practice. The law also regulates working conditions and prohibits all forms of forced or compulsory labor, but the GOI has not effectively monitored or enforced the law, which has resulted in unacceptable working conditions for many workers. Iraq continues to face a high level of violence and insecurity, high unemployment, a large informal sector, and lack of satisfactory work standards.

The existing Saddam-era labor law, which also applies to the IKR, addresses working conditions for foreign expatriate workers and rules governing working hours. A law more consistent with current international standards was drafted with the assistance of the International Labor Organization (ILO) and approved by the Shura Council in 2010, but it has yet to be enacted.

Iraq is a party to both International Labor Organization (ILO) conventions related to youth employment, including child labor. The Ministry of Labor and Social Affairs (MOLSA) 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 these allowance amounts.

The National Investment Law states that priority in employment and recruitment shall be given to Iraqis. However, international companies have noted that Iraq lacks a skilled labor force and the country has a need for human resource development. With a lack of skilled workers, foreign investors often must rely on foreign workers. However, there are labor-related requirements for foreign companies employing Iraqi or third-country nationals. Furthermore, foreign investors are expected to help train Iraqi employees to increase their efficiency, skills, and capabilities.

Foreign Trade Zones and Ports

The Free Zone Authority Law No. 3/1998 (FZL) permitted investment in Free Zones (FZ; similar to a U.S. Foreign Trade Zone) 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 Kurdistan Region, a separate zone is being developed outside of Sulaymaniyah, to be led by private master developers. 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 FZs.

Foreign Direct Investment Statistics

According to the United Nations Conference on Trade and Development (UNCTAD), FDI flow into Iraq reached $1.6 billion in 2011 (the most recent year for which statistics are available), up from $1.4 billion in 2010.

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FDI (USD million)

2005

2006

2007

2008

2009

2010

2011

FDI Inflow

515

383

972

1,856

1,598

1,396

1,617

FDI Outflow

89

305

8

34

72

125

77

Source: UNCTAD

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Trade (USD million)

2005

2006

2007

2008

2009

2010

Imports

26,096

24,198

21,488

36,986

41,936

49,467

Exports

24,053

30,887

40,455

65,693

46,230

57,966

Source: UNCTAD

According to an analysis by Investment Consulting Associates in “The New Iraq – 2013 Discovering Business,” from 2003 to 2011 the country attracted almost US$70 billion in FDI, with a sharp increase in FDI projects after 2008. Although 2011 showed an increase in the number of jobs created and capital attracted, the total number of FDI project declined for the first time since 2007.

According to the National Investment Commission, over 950 firms have filed for investment licenses in Iraq, at both the national and provincial level, with a total value of approximately $50.5 billion. All but 27 were issued by PICs, and 145 of them were issued to foreign companies, though in some cases there are Iraqi investors or capital along with the foreign partner. 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.

In the IKR, 128 licenses were granted in 2012 with a total potential value of $6.3 billion. While the granting of a license by Kurdistan Board of Investment does not guarantee that the proposed investment will be implemented, the potential value of the projects increased 133 percent over the licenses issued in 2011. Most of the investment in 2012 (67 percent) went to the governorate of Erbil.

Real estate remains the largest non-oil area of foreign participation in Iraq’s economy. In 2011, the GOI began negotiations with foreign companies for its largest housing project yet, a 100,000-unit complex located in Besmayah. The $8 billion contract was won by Korean firm Hanwha, and the complex is expected to take several years to complete. Other major building contracts signed in 2012 include a $45 million contract with UAE’s Construction Tech to rebuild the CBI, $185 million to Kar Construction & Engineering to build 2,000 homes north of Baghdad, $55 million to a Turkish firm to build 1,200 homes in Kirkuk, $247 million to an Italian firm to build 2,000 homes in Diwaniya, and a $98 million contract with RW Middle East to develop 1,300 housing units in Samawah. The British firm Harlow International will officially open in 2013 the Harlow Riverside business park, consisting of residences, offices, restaurants, and amenities. In Thi Qar province, U.S. firm, Markez Inc. won a contract to build 1,000 housing units in Nasiriyah.

In October 2012, Iraq signed a $14 million deal with U.S. consortium North America Western Asia Holding (NAWAH) to modernize the Maqal Port on the Shatt al-Arab waterway. The ten-year agreement includes dredging the waterway to nine meters to make it a deep water port. The NAWAH is headed by Paul Brinkley, former Director of the Task Force for Business and Stability Operations (TFBSO) in Iraq, responsible for economic revitalization and stabilization efforts in the country.

Oil sector representatives say investment in oil production could be on the order of $15-20 billion in 2013; since the Iraqi government is contractually obligated to reimburse oil companies for these expenditures and therefore is the owner of the equipment, it is considered government investment rather than FDI.

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