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Kurdistan region seeks more foreign investment
4.4.2007
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April 4, 2007
Kurdistan region (Iraq), -- You would be hard
pushed to find an area keener on attracting foreign
investors than Iraqi Kurdistan. The region is almost
entirely dependent on imports, as the authorities
search for ways to rebuild an economic base that was
all but destroyed during the Anfal campaign of
Saddam Hussein in the late 1980s.
Local industry and, especially, agriculture (once
the dominant employer in Kurdistan) were all but
annihilated by the time Kurdistan gained its
autonomy in late 1991. Large parts of the local
population had been forcibly evicted from their
razed villages to the towns by Saddam, and
subsequently employed in the public sector in an
effort to ensure their dependence on Baghdad (even
now some 1.1m people out of the Kurdistan population
of 5m still work in the public sector). Meanwhile,
infrastructure was left to deteriorate, and several
universities and schools closed. From such an
unpromising beginning, the Kurdistan Regional
Government (KRG) was born, comprising the three
governorates of Dohuk, Erbil (the regional capital)
and Suleimaniyah. A civil war between the two main
Iraqi Kurdish parties—the Kurdistan Democratic Party
(KDP) and the Patriotic Union of Kurdistan (PUK)—between
1994 and 1996 hardly helped matters, and led to a
splitting of the administration into their
respective strongholds in Erbil and Suleimaniyah.
Since that time, however, the region's fortunes have
revived, as the toppling of Saddam Hussein in 2003
and the descent into anarchy in Baghdad and much of
central Iraq, combined with a rapprochement between
the PUK and the KDP (most state ministries are now
merged and located in Erbil), has seen the KRG area
emerge as a relative haven of stability.
Gateway
This has allowed the KRG to project itself as a
"gateway to Iraq", aiming to draw in foreign
companies seeking to take advantage of the
reconstruction opportunities in "Arab Iraq", but
which are deterred by the lack of security
throughout much of the rest of the country. However,
even this is proving a challenge. Despite there
having being only two bomb attacks in Kurdistan
since the fall of Saddam in 2003, the region's image
continues to suffer from the headline-grabbing
horrors witnessed daily in other parts of the
country, and Western officials and businessmen still
often prefer to hire private security firms to ferry
them around. Such attitudes exasperate some in the
KRG—as well as the general public—and it is easy to
sympathise with their frustration. At least in the
cities, the Peshmerga maintain a reassuring, albeit
somewhat pervasive, presence, and the locals are
friendly, and, as such, Westerners are often seen
walking unaccompanied.
The government has sought to supersede security
concerns by passing one of the most
foreigner-friendly investment laws in the entire
Middle East. Under the investment law of 2006,
foreigners not only enjoy some of the advantages on
offer in various other Arab states—such as a
ten-year tax holiday, and free repatriation of
capital—they can also purchase land (for only a
"symbolic" fee), which will be theirs for
perpetuity. The law has been widely praised by both
local and foreign businesses in the area, and,
according to the head of the Board of Investment,
Herish Muhamad, as of March some 17 firms had
already registered. Yet his admission that most of
these were connected to property projects highlights
the unbalanced nature of the region's current
economic recovery.
Real estate boom
The property sector in Kurdistan is booming. The
massive US$1bn "Nishtiman" shopping mall is under
construction in the centre of the Erbil, and a
swathe of housing projects, including notably "Dream
City" on the outskirts of the city, are presently
in-build. A leading local businessman, Ahmed Rekami,
whose US$20m "New City"—which boasts a shopping
mall, and 52-room hotel—recently opened in the
centre of town, likens the situation to Dubai in the
1990s. Indeed, the bullish Mr Rekami relates that he
has turned down the opportunity to move to the
emirate because the opportunities in Kurdistan are
so vast.
Yet, with this economic upturn has come associated
inflationary pressures—according to Professor Almas
Heshmati, head of the department of economic and
finance at the newly-constructed University of
Kurdistan Hawler, house prices have doubled over the
past few years—and Mr Rekami says that the price of
cement has risen from US$50/tonne in 2003 to
US$170/tonne. A new cement plant built by Egypt's
Orascom Construction Industries (in partnership with
the local Farouk Rasool Group) near Suleimaniyah is
set to open in August, but this will provide only
partial respite. In addition, not all the blame for
inflation can be laid at the door of the property
sector—intermittent influxes of budgetary cash from
Baghdad cause sudden fluctuations in the money
supply, and fuel prices have leapt because of a
shortage of refined products (leading to a thriving
black market). However, perhaps more importantly, it
is not excess cash but the supremacy of cash that is
holding back the Kurdistan economy at present.
Cash economy
The banking sector in Kurdistan is severely
underdeveloped. Cash dominates, to such an extent
that when asked what people buy their houses with,
Adham Darwesh, the general manager of the Central
Bank of Kurdistan, replied (through a translator):
"piles of cash". In interviews, the trade and
planning ministers, as well as the head of the
investment board, all acknowledged the lack of a
developed financial system as a serious hindrance.
However, there may well be room for optimism.
Although Mr Rekami's complaint that the banks offer
little more than a money transference service may be
true at present, the arrival of new foreign banks,
including Dar Es Salam (80% owned by HSBC) and most
recently Lebanon's Byblos Bank, should help increase
capacity. The head of the investment board also
revealed that another Lebanese bank, Bank Audi, is
in negotiations about setting up in the region, and
he argued that the banking situation will be "sorted
out very soon". Achieving this will be crucial, and
not just because of the extra support it will offer
to private-sector ventures. The opacity associated
with having to deal almost solely in cash can often
prove a deterrent to foreign businessmen, and
corruption in Kurdistan is a widely-acknowledged
problem.
However, for those within Kurdistan, the most urgent
need is for substantial foreign investment. The
government is seeking foreign money to finance the
huge infrastructure upgrades needed—including a
proposed road linking all three of Kurdistan's main
towns with their borders—and Mr Muhamad floated the
intriguing option of "sharing management services"
usually associated with the government, such as
greater private-sector participation in the
education sector, and even potentially PFIs in road
and bridge construction. With the constitution
confining sovereign debt issuance solely to the
federal government, and the KRG allocated just 17%
of federal oil revenue (after current spending)--the
planning minister, Othman Shwani, among others, has
argued that Kurdistan needs more, considering
Saddam's legacy in the Kurdish areas—foreign money
is desperately needed.
Local businessmen are extremely keen on forming
partnerships with foreign firms, with Baz R. Karim,
the president of local KAR Group, putting forward
the argument that joint ventures are the most
successful model for doing business in the country
as a whole. His firm's record would seem to support
his view, having completed a raft of projects across
both the civil and oil sectors. For example, in
partnership with USAID, the firm has supplied
furniture to over 2,800 schools all over Iraq,
successfully installed a fibre-optic cable in
Baghdad and further north with Bechtel of the US,
and says it is more than halfway through the US$175m
Hamrin oilfield project, a joint venture with OGI
Group of Canada, located south of Kirkuk. Yet
finding sufficient foreign enthusiasm for such joint
ventures is perhaps proving the greatest challenge.
Although Turkish firms have poured into Kurdistan
over the past ten years, the much sought-after
Western firms, with their up-to-date technology and
high-quality products, have so far proved more
reticent. Legal concerns have deterred the arrival
of new oil firms—although five small- and
medium-sized companies have signed contracts with
the KRG—as the federal oil law awaits approval in
Baghdad.
Meanwhile, security concerns also still appear to
predominate, and not just among Western companies.
Despite the warm words of Western governments
towards the KRG, these sentiments do not seem to be
shared by their visa offices. Dara Jalil al-Khaymat,
the president of the Erbil Chamber of Commerce,
highlighted EU countries' regular refusal to issue
local businessmen with visas as a major impediment,
while Mr Muhamad pointed out that one of his keynote
official speakers could not attend a business forum
in London because UK immigration had refused his
visa request. Meanwhile, direct bilateral aid has
been in short supply and often misdirected—a finance
official in Suleimaniyah said that the area has
received only US$80m from the US in direct aid, most
of which was spent on police stations they did not
want. A plan to set up two free zones in the region
may help, although it is not entirely clear what
extra incentives these could provide beyond those
included in the Investment Law. As such, the KRG is
still struggling to attract the Western firms and
finance it so desperately needs. Although the old
lament that the Kurds have "no friends but the
mountains" may no longer be entirely true, it
appears, at the moment at least, that some in
Kurdistan still need convincing..
economist com
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