2009 INVESTMENT CLIMATE STATEMENT - IRAQ

UNCLAS SECTION 01 OF 06 BAGHDAD 000265

SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON ETRD PGOV IZ
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT - IRAQ

Ref: 08 State 123907

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2009 INVESTMENT CLIMATE STATEMENT - IRAQ

Sectarian violence and acts of war and terrorism declined
dramatically in Iraq over the course of 2008. These security gains
remained fragile, and potential investors still identified security
as their chief concern when considering whether to build a business
here. Nevertheless, reduced violence offered the Government of Iraq
(GOI) and the Iraqi private sector the space to move more actively
toward putting in place a modern business and investment climate.

There were several advances in 2008: The GOI created the National
and Provincial Investment Commissions; two large state-owned banks
made progress toward restructuring; and the private banking sector
grew significantly. The GOI also made steady, if slow, progress
towards World Trade Organization (WTO) accession. However, the
overall investment climate remained unfriendly, especially to small
and medium investors. The GOI did not enact key laws and
regulations to improve the investment climate, nor did it act to
comply with international instruments. In addition to the still
significant security concerns, cumbersome procedures for new
business registration, long delays, unclear land and property
titling, unreliable dispute resolution mechanisms and endemic
allegations of corruption also deterred investment. More broadly, a
legacy of central planning and inefficient state-owned enterprises
continues to slow Iraq's attempts to become more market-based. In
its 2008 "Doing Business" Report, the World Bank ranked Iraq 152nd
of 181 nations overall.


OPENNESS TO FOREIGN INVESTMENT

The GOI has stated its commitment to attracting foreign investment
and made several efforts in 2008 to improve its investment climate.
It continued to implement the National Investment Law (NIL) of 2006,
which provides a good base line for a modern legal structure to
protect foreign and domestic investors. It provides for tax and
other incentives, and once implementing regulations are added, the
NIL's provisions should provide an open investment regime for
foreign investors. However, the NIL does not permit foreign
investors to own land, though they may lease (for 50 years,
renewable). It also does not cover investments in the oil, banking
and insurance sectors. (A copy of the National Investment Law can
be obtained from the U.S. Department of Commerce Iraq Task Force
website - http://www.export.gov/iraq/.) The GOI and regional
authorities have sponsored several conferences intended to attract
investors, including the November 2008 U.S.-Iraq Dialogue on
Business and Investment Climate, which focused attracting U.S.
investors.

In accordance with the NIL, the GOI formed the National Investment
Commission (NIC) and established Provincial Investment Commissions
(PICs) in every province in 2008. The NIC and the PICs are designed
to be "one-stop shops" that can provide information, sign contracts,
and facilitate registration for new foreign and domestic investors.
In addition to being on a steep learning curve, Investment
Commissioners struggled with unclear lines of authority, budget
restrictions, and the absence of regulations and standard operating
procedures. The GOI also failed to confirm the NIC
Chairman-Designate and later dismissed him. This uncertain
leadership situation -- along with other equally significant
problems, including unclear land transfer policies, a lack of
infrastructure coordination for investment projects, and provincial
governments' inability to manage and facilitate investment projects
Qgovernments' inability to manage and facilitate investment projects
-- contributed to the fact that many of the investments the NIC had
announced did not actually break ground.

Regulation of investment is not an exclusive federal power, so the
Kurdish Regional Government (KRG) and the national government both
have the right to regulate investment. The KRG has its own
investment law (Law 89 of 2004). The most significant difference
between the KRG investment law and the national law is that the
regional law allows foreigners to own land. Under the Iraqi
Constitution, when there is a contradiction between regional and
national legislation in the area of land ownership, the regional law
becomes applicable; in Kurdistan, KRG investment law has been
applied in practice to the benefit of foreign investors for land
ownership and oil contracts.

CURRENCY CONVERSION AND TRANSFER POLICIES

The currency of Iraq is the Dinar (IQD - sometimes referred to as
the New Iraqi Dinar). The Iraqi authorities confirm that in
practice there are no restrictions on current and capital
transactions involving currency exchange as long as underlying
transactions are supported by valid documentation. The
International Monetary Fund's annual publication on Exchange
Arrangements and Restrictions states that: "Restrictions on capital

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transactions are not enforced; however, documentation and reporting
requirements apply." The National Investment Law contains
provisions that, once implemented, would allow investors to bank and
transfer capital inside or outside of Iraq.

The Government of Iraq's monetary policy since 2003 has focused on
maintaining price stability primarily by appreciating the IQD
against the US dollar while seeking to maintain exchange rate
predictability. Banks may engage in spot transactions in any
currency, but are not allowed to engage in forward transactions in
Iraqi Dinar for speculative purposes. There are no taxes or
subsidies on purchases or sales of foreign exchange. Improved
security has allowed for an increased supply of goods and services,
which has reduced inflationary pressures as compared to 2006. The
Central Bank's monetary and exchange rate policies have continued to
help temper inflation, which is down from a high of 76.6 percent in
2006 to 12.3 percent in November 2008.

EXPROPRIATION AND COMPENSATION

Article 23 (Second) of the Iraqi Constitution prohibits
expropriation in Iraq, unless it is "for the purpose of public
benefit in return for just compensation." The constitutional
provision further stipulates that this provision shall be regulated
by law, but legislation has yet to be considered. Article 12
(Third) of the National Investment Law also guarantees "non-seizure
or nationalization of the investment project covered by the
provisions of this law in whole or in part, except for a project on
which a final judicial judgment was issued," but the absence of
implementing regulation makes the application of the law uncertain
in practice. As a result, whether foreign investors will enjoy
protection from expropriation that meets international standards
will likely depend on domestic implementing legislation and/or
future bilateral treaty obligations with investor states. The
United States does not have a Bilateral Investment Treaty (BIT) with
Iraq.

DISPUTE SETTLEMENT

While the law of domestic arbitration is fairly well developed in
Iraq, international arbitration is not sufficiently supported by
Iraqi law. Iraq is a signatory to the League of Arab States
Convention on Commercial Arbitration (1987) and the Riyadh
Convention on Judicial Cooperation (1983),but it has not signed or
adopted the two most important legal instruments for international
commercial arbitration: The United Nations New York Convention on
Recognition and Enforcement of Foreign Arbitral Awards (1958 --
commonly called the New York Convention) and the attendant rules and
procedures established by the UN Commission on International Trade
Law (UNCITRAL).

Article 27 of the NIL, which details the rights of Iraqis and
foreigners with respect to Iraqi law, refers to dispute resolution.
However, the absence of implementing regulation makes application of
the law uncertain in practice.

Domestic arbitration is provided for in Articles 251-276 of the
Iraqi Civil Procedure Code, which require arbitration agreements to
be in writing. Panels of arbitrators are available through the
Iraqi Union of Engineers, the Iraqi Federation of Industries, and
private arbitrators.

PERFORMANCE REQUIREMENTS AND INCENTIVES

The NIL allows in theory both domestic and foreign investors to
qualify for incentives equally. It also allows for investors to
take out capital brought into Iraq, and its proceeds, in accordance
with the law. Foreign investors are able to trade in shares and
securities listed on the Iraqi Stock Exchange. In principle, the
Qsecurities listed on the Iraqi Stock Exchange. In principle, the
law also allows investors who have obtained an investment license to
enjoy exemptions from taxes and fees for a period of ten years.
Hotels, tourist institutions, hospitals, health institutions,
rehabilitation centers and scientific organizations also are granted
additional exemptions from duties and taxes on their imports of
furniture and other furnishings. The exemption theoretically
increases to fifteen years if Iraqi investors own more than fifty
percent of the project; however, the absence of implementing
regulation makes uncertain the application of the law in practice.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

The National Investment Law does not allow foreigners to own land.
Foreign investors are permitted to rent or lease land for up to
fifty years (renewable). Foreign investors are also able to own
investment portfolios in shares and securities.

PROTECTION OF PROPERTY RIGHTS

Iraq currently does not have adequate statutory protection for
intellectual property rights (IPR). The GOI is in the process of
developing a new IPR law to comply with the WTO Agreement on Trade

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Related Aspects of Intellectual Property Rights (TRIPS). The draft
law covers patent, trademark and copyright, and it is hoped that
strong implementing regulations will help consolidate IPR protection
functions, which are currently spread across several ministries,
into a "one-stop" IPR office. (Currently, the Central Organization
on Standards and Quality Control (COSQC),an agency within the
Ministry of Planning, handles the patent registry and industrial
design registry; the Ministry of Culture handles copyrights; and the
Ministry of Industry and Minerals houses the office that deals with
trademarks.) Although the new draft will offer adequate statutory
IPR protections, it has been stalled in the constitutional review
process since mid-2007. The GOI's ability to enforce IPR
protections remains weak.

Iraq is a signatory to several international intellectual property
conventions, and to regional or bilateral arrangements, which
include:

-- 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 absence of implementing regulation for the National Investment
Law makes uncertain the application of the law in practice. Once
fully implemented, the law would establish a legal framework for
investment. Potential investors would nonetheless still face
significant hurdles in understanding the basic steps for starting
and operating a business in Iraq given the complexity of Iraq's
existing laws, regulations, and administrative procedures. The
Iraqi Government has established and staffed National and Provincial
Investment Commissions (NIC / PICs) as required under the National
Investment Law. The NIC announced in October that in its first 10
months of existence, it had attracted $74 billion in FDI to Iraq
(although only a fraction of that has progressed to the stage of an
actual signed investment contract). PICs have also been active in
assisting regional investors. However, NIC and PIC Commissioners
and their staff lack training and expertise, and have not developed
an effective "One Stop Shop" for investors to ease their entrance
into the Iraqi market. The U.S. government and other donors are
sponsoring significant capacity development for both the NIC and
PICs; however, these initiatives will take time to pay dividends
for Iraq's investment regime.

The absence of other laws in areas of interest to foreign investors
also creates ambiguity. Iraq's WTO Legislative Action Plan for the
Implementation of WTO Agreements -- the legislative "road map" for
Iraq's eventual WTO accession -- requires competition and consumer
protection laws that are critical for leveling the business playing
field. Both are in the drafting stage with the competent Ministry
and were expected to be sent to the Council of Representatives in
2008, but they have been delayed. Without a competition law,
investors do not have statutory protection against unfair business
practices such as price-fixing by competitors, bid rigging, and
abuse of dominant position in the market. Likewise, the lack of a
consumer protection law means that investors and consumers have no
standard definition of unfair business practices. While the Iraqis
Qstandard definition of unfair business practices. While the Iraqis
do not currently have a building code for new construction, the GOI
is currently evaluating this area.

The way in which the Iraqi government promulgates regulations is
opaque and lends itself to arbitrary use. Regulations imposing
duties on citizens or private businesses are required to be
published in the Gazette. However, internal Ministerial regulations
are not. This loophole allows bureaucrats to create internal
requirements, procedures or other "turnstiles" with little or no
oversight and use them to place additional burdens or exact payoffs
from investors or other businesspersons.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

The Central Bank of Iraq (CBI) is responsible for conducting
monetary policy in Iraq. The CBI was re-organized by CPA Order No.
56 as a legal public entity that has financial and administrative
independence. The Iraqi banking system includes seven state-owned
banks, the two largest being Rafidain and Rasheed, which account for
about 96 percent of banking sector assets. There are also 32
private banks and six Islamic banks licensed by the CBI (see CBI's
website - www.cbiraq.org). Eleven foreign banks have either been
licensed or have strategic investments in Iraqi banks.



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Although the volume of bank lending is growing, the majority of
banking operations remain confined to fee-based services. The
provision of credit is therefore largely conducted among individuals
in private transactions. Financial transfers from the government
to provincial authorities or individuals, rather than business
loans, is the major activity of the private banks; Iraq's economy
remains primarily cash-based.

The Trade Bank of Iraq (TBI) was established as an independent
government entity under CPA Order No. 20 in 2003. The TBI's main
purpose is to provide financial and related services to facilitate
import trade, particularly letters of credit. In early 2008 the
Ministry of Finance expanded trade finance opportunities for private
banks by allowing letters of credits in amounts up to $2 million to
be processed through the TBI and distributed to private banks.
There is discussion at the Finance Ministry about raising this
threshold.


The letter of the National Investment Law allows for foreign
investors to exchange shares and securities listed in the Iraqi
Stock Exchange (ISX). It also allows foreign investors to form
investment portfolios. Trading transactions and buy and sell orders
are presently written by hand on grease boards in trading sessions.
The automation of the ISX, expected in 2009, will provide greater
speed and transparency than the current system. There are also
discussions about allowing shares to be dematerialized (electronic
book keeping by custodians) thereby easing the logistical burden of
transferring physical certificates. In addition, a new permanent
securities law has largely completed the Constitutional review
process and could move to the Council of Representatives for
enactment in 2009, and rules and regulations for the Iraqi
Securities Commission (ISC) have been completed. Until the new law
passes, an extension of previous regulations will secure the status
of the ISC.

POLITICAL VIOLENCE


Security continues to be a serious concern of the Iraqi Government.
Despite great improvements in 2008, Iraq remains dangerous, volatile
and unpredictable; interested investors still cite security as their
primary obstacle when seeking to enter the Iraqi market. Violence
against both foreigners and Iraqis persists, and the threat of
attacks against U.S. citizens and facilities remains high. In
addition, roads and other public areas continue to be dangerous for
Iraqi or foreign travelers. Law enforcement is limited, although
new Iraqi police units continue to be trained and deployed. Attacks
against military and civilian targets throughout Iraq continue,
including in the International (or "Green") Zone.

Targets include trucking and military convoys, hotels, restaurants,
police stations, security checkpoints, foreign diplomatic missions,
international organizations and other locations with expatriate
personnel. In addition, there have been planned and random
killings, as well as extortions and kidnappings. U.S. citizens and
other foreigners, as well as Iraqi officials and citizens continue
to be targeted by insurgent groups and opportunistic criminals for
kidnapping and murder.

The U.S. Department of State issues up-to-date travel warnings for
countries throughout the world, and U.S. companies and visitors are
advised to assess carefully the situation in Iraq by consulting the
Department's Travel Warning at
http://travel.state.gov/travel/iraq_warning.h tml and its Consular
Information Sheet at http://travel.state.gov/travel/iraq.html.
These sites contain the essential security and safety information on
QThese sites contain the essential security and safety information on
travel to Iraq.

In addition to violence, investors must be prepared to deal with
unreliable delivery of essential sewer, water and electrical
services and the impact this has on business development and
operating costs.

CORRUPTION

Corruption in all areas remains a significant problem. Under
Saddam's regime, corruption was a fact of life for every Iraqi and
touched upon every economic transaction. The former regime's
control of the economy left a legacy of heavy state procurement and
subsidies distorting market prices. Unfortunately, undoing this
legacy will be a long process, and investors still may have to
contend with requests for bribes or kickbacks from government
officials at all levels.

The Commission on Public Integrity (CPI) (now known as the
Commission on Integrity or Integrity Commission - COI) is an
independent, autonomous Iraqi governmental agency, established by
CPA Order No. 55, responsible for anti-corruption, law enforcement
and crime prevention, as well as public education on these topics.
COI investigates nationwide allegations of corruption within the

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government and refers cases to the Iraqi judiciary. It performs its
duties in conjunction with the Board of Supreme Audit (BSA) and the
Inspectors General (IG) from each ministry. There is a need to
impose and enforce credible penalties for government corruption,
specifically adherence to laws related to government contracts,
procurement and allegations of bribery. The number of corruption
cases brought to a successful conclusion remains quite small and at
the lower levels, and the statutory and regulatory provisions
intended to control corruption will require substantial revision to
be effective.

Transparency International in its Corruption Perception Index (CPI)
has ranked Iraq in a tie for 2nd to last place. While part of this
perception is due to the legacy left by Saddam Hussein, there is
ample evidence that corruption remains a major challenge unless
there are significant changes in the Iraqi government and its body
politic.

Iraq signed and ratified the United Nations Convention against
Corruption in March 2008 and is just starting the process of self
evaluation on what changes are required to come into compliance.
This process is likely to be the next big test of political will as
to whether Iraq is serious about confronting corruption. Iraq has
also endorsed the World Bank's Extractive Industry Transparency
Initiative and is seeking to become a full member.

BILATERAL INVESTMENT AGREEMENTS AND REGIONAL COOPERATION

Iraq is a signatory to some form of investor protection agreement or
memorandum of understanding with thirty-two bilateral partners and
nine multilateral groupings. However, none of these is as
all-encompassing as a U.S. Bilateral Investment Treaty (BIT). These
agreements include arrangements on Investments Promotion and
Protection (IPPA) within the Arab League, as well as some type of
bilateral agreements with other countries including Afghanistan,
Bangladesh, India, Iran, Japan, Jordan, Kuwait, Germany, Mauritania,
Republic of Korea, Sri Lanka, Syria, Tunisia, Turkey, the United
Kingdom, Vietnam and Yemen. These agreements include general
provisions on promoting and protecting investments, including
clauses on profit repatriation, access to arbitration and dispute
settlements, fair expropriation rules and compensation for losses.
However, the Iraqi government's ability to enforce them remains
uneven.

In addition, Iraq has bilateral free trade area (FTA) agreements
with the following eleven countries: Algeria, Egypt, Jordan,
Lebanon, Oman, Qatar, Sudan, Syria, Tunisia, Yemen, and the United
Arab Emirates. Iraq is also a signatory to several multilateral
agreements, including the "Taysir" agreement with Arab countries
dated February 27, 1982, and ratified in January 11, 1982.

On July 11, 2005, Iraq and the U.S. signed a Trade and Investment
Framework Agreement (TIFA) as a first step toward increasing trade
and investment cooperation between the U.S. and Iraq. The Iraqi
Parliament has yet to ratify this agreement.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The Overseas Private Investment Corporation (OPIC) and the
Government of Iraq executed an Investment Incentive Agreement (IIA)
in 2005. However, the Iraqi Parliament has yet to ratify this
agreement. Without the IIA, OPIC has been able to offer programs in
Iraq on a temporary basis and only because of a unique Congressional
waiver of OPIC's statutory IIA requirement. These include the
ability to finance a variety of investment projects with substantial
U.S. participation. Some of OPIC's basic programs include
QU.S. participation. Some of OPIC's basic programs include
structured finance projects; political risk insurance; investment
funds and financing for small and medium-sized enterprises; and a
planned mortgage pilot program.

LABOR

Iraqi labor law remains weak in promoting a flexible,
business-friendly employment environment. The existing Saddam-era
law includes non-supportive benefit clauses, working conditions for
foreign expatriate workers, and rules governing working hours.

Iraq is a party to both International Labor Organization (ILO)
Conventions related to youth employment, including child labor
abuse. The Ministry of Labor and Social Affairs (MOLSA) also sets a
minimum monthly wage for unskilled workers. In addition, according
to Iraqi law, all employers must provide some level of transport,
accommodation, and food allowances for each employee. The law does
not fix allowance amounts.

The National Investment Law states that priority in employment and
recruitment shall be given to Iraqis. In addition, foreign
investors are expected to help train Iraqi employees as well as to
raise their efficiency, skill, and capabilities. There are existing
labor-related requirements for foreign companies employing Iraqi or
foreign workers.

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FOREIGN TRADE ZONES AND PORTS

The Free Zone Authority Law No. 3/1998 (FZL) permitted investment in
Free Zones (FZ) through industrial, commercial, and service
projects. This law operates under the Instructions for Free Zone
Management and the Regulation of Investors' Business No. 4/1999 and
is implemented by the Free Zones Commission in the Ministry of
Finance.


In theory, capital, profits, and investment income from projects in
an FZ are exempt from all taxes and fees throughout the life of the
project, including in the foundation and construction phases.
Goods entering into Iraqi commerce from FZs are subject to Iraq's 5
percent tariff; no duty is leveled on exports from FZs.

Activities permitted in Free Zones include: (a) industrial
activities such as, assembly, installation, sorting, and refilling
processes; (b) storage, re-export and trading operations; (c)
service and storage projects and transport of all kinds; (d)
banking, insurance and reinsurance activities; and (e) supplementary
and auxiliary professional and service activities. Prohibited
activities include actions disallowed by other laws in force, such
as weapons manufacture, environmentally-polluting industries and
those banned because of place of origin.

There are currently four geographic areas designated as Free Zones.
The Basrah/Khor al-Zubair Free Zone is located 40 miles southwest of
Basrah on the Arab Gulf at the Khor al-Zubair seaport. This area
has been operational since June 2004. The Ninewa/Falafel Free Zone
is located in the north, near roads and railways that reach Turkey,
Syria, Jordan and the Basrah ports. The Al-Qa'im Free Zone is on
the Iraqi-Syrian border and is being rehabilitated to its pre-2003
state, and an undeveloped zone in Fallujah is in the planning
stages. In the Kurdish area a separate zone is being developed in
Sulaymaniyah, to be lead by private master developers. Two other
zones are in the discussion stage in the region: Erbil and Zarko.
However, none of these areas is operating as a significant focal
point for investment or trade, and only the Ninewa/Falafel zone has
businesses operating in it. The Free Zone Commission lacks
operational vision and capacity.

FOREIGN DIRECT INVESTMENT STATISTICS

The National Investment Commission and 15 Provincial Investment
Commissions outside of the KRG signed or successfully concluded
negotiations on investment licenses totaling 2 billion USD from
January to November 2008, which also included capital from some
Iraqi firms. Two foreign investor consortia also signed joint
venture investments in two state-owned factories with the Ministry
of Industry, totaling 300 million USD. According to the KRG
Investment Board, foreign investment in the region totaled 15
billion USD between 2007 and the first half of 2008.

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CROCKER