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Fortune flows to Kurdistan
18.12.2006
Arabies Trends, December 2006 issue, by Tanya
Goudsouzian Sulaimaniyah (Kurdistan) |
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December 18, 2006
Opportunities await investors in Iraq's sole region
of promise, but they would be wise to proceed with
caution. Echirvan Barzani, the dapper and personable
prime minister of the Kurdistan Region, clearly
loves a challenge. Like Sheikh Rashid bin Saeed Al
Maktoum, the visionary ruler of Dubai who is
credited with transforming the emirate from a pearl
diving backwater to an international business hub,
Barzani intends to turn his part of the world -
northern Iraq -into Iraq's commercial gateway.
He has his work cut out for him. Northern Iraq might
be an oasis of calm compared with the rest of the
country, but it is not immune to the chaos that
reigns in the south. Infrastructure is next to
non-existent, as are the legal and financial
frameworks necessary to do business.
But in early July the Kurdistan Parliament passed
the Foreign Investment Law, which allows for full
ownership and repatriation of profits, and, in the
words of Barzani, is "characterized by fairness,
equitable treatment for all investors, appropriate
legal guarantees and, of course, incentives for
foreign businesses."
In the same vein, energetic campaigns are being
waged in the US and Europe to promote what they've
dubbed "the other Iraq." Investors who are being
wooed are advised they should not be distracted by
the often sensationalized media reports of what is
going on in the rest of Iraq, as the relatively
secure and stable Kurdistan Region offers lucrative
business opportunities in the midst of the
large-scale reconstruction efforts currently
underway.
At the Second International Construction Innovations
Conference, held in Illinois in October, Qubad
Talabani, the son of Iraqi President Jalal Talabani,
and the Kurdistan Regional Government's (KRG)
representative in the US, cajoled investors not to
wait for "Iraq to become Switzerland before
investing," as they would lose out to foreign
companies that are already beginning to do business
in the region.
Opportunities are aplenty, but that is only because
the country is a virtual blank slate. What
destruction wasn't visited on it by Saddam Hussein
the Kurds themselves have done through incessant
infighting, which broke out soon after autonomy was
wrested from Baghdad in 1992.
Progress now at hand. But with its newfound
stability has come progress. Erbil, the capital, is
casting off its dowdy provinciality. A gleaming new
shopping center, the New City Mall, was recently
inaugurated, a North American-style mall that is an
abrupt departure from the bazaars that still supply
everything from burkas to bread. Already immensely
popular, the mall expects to attract big name
retailers from the Gulf and Europe, and the fact
that most Kurds earn between $300 and $800 a month
is not proving to be a hurdle.
In fact, confidence in the future takes little
account of present realities. Instead, the Dubai
pragmatism of "build it and they will come" dictates
decision-making.
A few months ago, the KRG announced it wanted to
duplicate Dubai Media City, the sprawling complex in
the UAE that employs thousands of journalists,
designers and advertising people.
In the neighboring city of Sulaimaniyah, which has
been the stronghold of the Patriotic Union of
Kurdistan (PUK) - the party headed by Iraqi
President Jalal Talabani - reconstruction is moving
at a slower pace: the authorities are still
sidetracked by internal party squabbles, and
economic progress is hampered by indecision.
Typically, the PUK's AsiaCell telecoms network
hasn't been given permission to operate in Erbil,
and politics is the reason. Old grievances die hard,
even though the two ruling Kurdish parties - the
other being the Kurdistan Democratic Party (KDP)
headed by Iraqi Kurdistan's President Massoud
Barzani - have now united to form the KRG.
Foreign businessmen warn newcomers to exercise
caution and educate themselves before venturing into
this uncharted territory. Lines demarcating the
jurisdiction of the Kurdish authorities and the
central Iraqi government are still hazy, and
political tensions between the Baghdad government
and the Kurds, who want full independence, still run
strong. Many of the lucrative petroleum contracts
signed by the Kurdish authorities with foreign firms
are not honored by the central government in
Baghdad.
Handshake agreement. Because no international banks
operate in the region, no letters of credit can be
issued for Kurdish firms seeking to do business with
foreign firms. Foreign firms must enter into an
agreement on the basis of a man's honor, a risky if
sometimes effective approach, or pay cash in
advance.
Said one European worker in Sulaimaniyah, who had
been forewarned and acted on it: "Our company got a
pretty good deal with the local government. We do
the work only if we have been paid for it in
advance, otherwise we stop everything. We've seen
what happens to other companies, and we don't want
that to happen to us. Payment is a big problem here
... and if they don't pay you, you have no legal
recourse in Kurdistan. All you can do is cut your
losses and leave."
Inevitably, given the parlous state of the legal
structure, corruption has surfaced. It doesn't help
that much of the business world revolves around the
Barzani family. In an interview in May, Prime
Minister Nechirvan Barzani, who is the nephew of
President Massoud Barzani, tried to play down
suggestions that the Barzanis were an oligarchy:
"Anyone who calls himself Barzani may not
necessarily be related to the family. It is a big
clan. If you ever visit the Barzan you will find
many people who call themselves Barzani but who are
unrelated to the family."
Even so, bigness seems to be the sticking point.
Small local firms complain that the new foreign
investment law will make it harder for them to
compete with experienced outsiders from Baghdad and
elsewhere for the most lucrative government
contracts. They believe the KRG must safeguard the
local economy by requiring foreign investors to
partner with local firms.
"The KRG should follow the model of successful Gulf
countries, where you can't even own a taxi cab
without giving a 51 percent share to a local
businessman," says Chato Dizayee, the managing
director of Broosk Trading & Contracting, the
Dubai-based e-commerce software developer. "For
example, in the UAE, you need a local sponsor to do
any kind of business. Why not do the same here? Why
not force foreigners to forge joint ventures with
local businessmen?"
Smooth operators. Already several large Baghdad
businesses have relocated to the Kurdish Region,
bringing their manpower with them. During Saddam
Hussein's rule, these firms built bridges and other
infrastructure commissioned by the government and
supplied the army. Their staff members are seasoned
operators and highly skilled.
Dizayee, who opened his Erbil office in 1998, says,
"Small local businesses are feeling the pressure.
Those local businessmen who started up recently
don't have as much experience as Baghdad companies
that had the benefit of years of dealing with the
contracts of the Iraqi army."
In the tenders for government projects, all
investors - whether, Kurdish, Iraqi or foreign -
compete on an equal footing. From there on in,
however, the professionals are soon separated from
the amateurs. The professionals use their supply
lines to bring in their materials and equipment
sourced from reputable companies. The amateurs
succumb to the "bazaari" mentality, buying cheaper,
often Chinese-made, materials and equipment locally.
The KRG government is powerless to stop the
practice.
"The government may not be able to stop the import
of cheap TVs and other household things, but for
specialized machinery and other strategic [goods],
we must start to reconsider our way of thinking,"
says Dizayee. "I am the sole agent for my products
in this region, and when I sell anything to any
office or ministry, I give them a certificate of
origin, even when they don't ask for it. I give it
and I advise them to ask for it in the future."
Setting a good example. Dizayee suggests the
government begin by buying approved materials and
equipment for its projects in order to set a
precedent for the private sector to follow. "Most
people don't realize the long-term benefits of
investing in better quality materials," he says. "It
is ironic because the average farmer in Kurdistan
may spend more money on a better tractor because he
knows what's good and what's bad; but many local
businessmen still haven't caught on. In the
construction industry, for example, they are still
buying cheap Chinese goods or, even worse, they
bring in old, used equipment left over by
neighboring countries, such as the UAE or Jordan."
Can the turbulent region hope to attract foreign
direct investment? While the Kurds have managed to
ward off terrorist infiltration so far, the
political future of "Kurdistan" remains uncertain.
The Kurdistan Region's relations with its neighbors
are nascent at best, which means disputes have not
yet reached a diplomatic outcome. Turkish firms may
have availed themselves of most of the big contracts
in Kurdistan, but the Turkish government is still
fuming over the KRG's reluctance to do anything
about the PKK guerrillas hiding in the northern
reaches of the border country, even though the
central Iraqi government has outlawed the group.
And, though an ethnic Kurd has been made President
of Iraq and is urging Iraqi solidarity at a time
when sectarian tensions are at their highest, the
KRG is working against him by taking unilateral
decisions such as ordering the removal of the
official Iraqi flag from Kurdish territory, thereby
arousing the ire of even those Iraqi Arabs who were
never allied with Saddam Hussein's Baathists.
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