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US warned of corruption hindering foreign
investment in Iraqi Kurdistan
30.8.2011
By Vladimir van Wilgenburg |
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August 30, 2011
AMSTERDAM, the Netherlands, — Recent
Wikileaks cables dated from 2007-2009 show that the
US believed corruption in Iraq’s Kurdistan region
was “pervasive” and widespread, and could hinder
foreign investment in the oil-rich area.
Earlier this year Iraqi President Jalal Talabani
hosted a lunch for Regional Coordinator and Regional
Reconstruction Team (RRT) Officers at his party’s
Patriotic Union of Kurdistan (PUK) headquarters in
Sulaimaniyah. Kurdistan Regional Government (KRG) US
representative Qubad Talabani and former PUK Counter
Terrorism Group chief Pavel Talabani, both sons of
the president, attended the lunch.
Regional Coordinator James Yellin criticized the KRG
for the lack of transparency and prevailing
corruption in the meeting.
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While President Talabani
agreed that these concerns hampered investment and
promised to form a committee, the RRT concluded
after the meeting, that “corruption is pervasive,
not only in Sulaimaniyah province, but in the rest
of the KRG. We doubt that the PUK will be able to
deal effectively with the problem.”
Corruption Could Reduce US
Investment
In other meetings, US officials also criticized the
Kurdistan government for corruption.
The Department of Commerce held its first trade
mission to Iraq in more than 20 years in June 2008.
During the mission, which took place in Erbil, US
Deputy Secretary of Commerce John Sullivan noted
that “the perception of corruption could materially
reduce the flow of US-sourced investment into the
region,” according to a cable dated July 20, 2008.
At that time then-KRG Deputy Prime Minister Omar
Fatah agreed that corruption could reduce
investment, and he stressed the “importance that US
businessmen see fair systems of awarding government
contracts, as well as transparent overall governance
based on the rule of law.”
Former KRG Trade Minister Mohammed Raouf, a
Kurdistan Islamic Union party leader, agreed that
there corruption existed, but indicated it was
unlikely that US firms would face corruption-related
obstacles in the Kurdistan Region.
He said, “If a powerful, large US company came here,
no one would dare ask for a bribe. Let's have just
one big US company enter, and we'll see if they have
problems. They won’t.”
In 2008, some US officials concluded that “as in the
rest of Iraq, the number of corruption cases
successfully prosecuted in the Kurdistan Region
remains negligible.” The US concluded that there
should be more corruption convictions against KRG
officials, and a more aggressive enforcement of
anti-corruption measures.
Services, Bureaucracy
Hinder Foreign Investment
Another cable written in July 2009 by the US embassy
in Baghdad shows that foreign direct investment was
impeded by an entrenched bureaucracy, lack of
infrastructure (electricity, lack of modern roads),
lack of banking and insurance services, lack of
skilled laborers in Kurdistan, limited consumer
market, opaque business practices and cronyism, the
KRG’s failure to deliver on its promises, and the
lack of a strategic plan to attract foreign
investment.
Again the US is highly critical of corruption, and
notes that the KRG needs a “transparent system of
contracting.” Investors complained to the US that
they have to work with Kurdish partners in order to
gain business. “Some of these Kurdistani partners
ask for exorbitant fees (51% of profit earned) in
exchange for their services, which may dissuade
small-scale investors,” the RRT mission in Erbil
noted.
The RRT’s criticism is partially the result of
complaints of American and international businesses
in the Kurdistan region. During an US Chamber of
Commerce visit to Erbil from February 3-4, 2009,
investors complained about routine "facilitation
fees".
“One investor described the practice of obliging
businesses to allow KRG companies to take equity
stakes in companies (usually affiliated with either
the Barzani or Talabani clan), as a more
sophisticated shakedown,” the cable report
mentioned.
Other investors complained to the US Chamber that
the KRG’s bureaucracy is inefficient and "never does
something the same way twice."
There were wide concerns over the professionalism
and independence of the KRG judiciary. The RRT
concluded, “that while many private investors feel
that the potential rewards to doing business in the
KRG are great, the risks associated remained
relatively high as well.”
Kurdistan No Gateway to
Iraq
The US leaked cables are also highly critical of the
KRG’s advertisements that the Kurdistan region is
the “gateway to Iraq” and suggests that the Iraqi
government resist the KRG’s efforts to attract
investment.
“Relatively few instances of companies successfully
establishing themselves elsewhere in Iraq based on
their start in the KR. In fact, many firms who have
chosen to work in the KR have experienced direct and
indirect resistance from Iraqi government
institutions regarding the commercial engagement
strategies in Iraq as a whole.”
Despite of the criticism of the Kurdish economy, the
RRT mission still notes that there is a western
interest in the Kurdistan market, and that the KRG
offers attractive terms for foreign investors. But
the RRT suggested that until the KRG addresses its
weaknesses, “it is unlikely to attract the level of
foreign direct investment that it needs to generate
the jobs and economic stability that come from a
strong and diversified private sector.”
Assessment of Transparency
Campaign
In July 2009, the KRG launched a “strategic good
governance and transparency” campaign to fight
corruption in its institutions with the support of
the international consultancy firm
PricewaterhouseCoopers.
“The purpose behind this conference is that the
Kurdistan Region wants to tell the whole world that
it is combating corruption,” said Nisar Nuri
Talabani,www.ekurd.nethead
of the good governance and transparency office, told
Rudaw in November 2010.
A leaked cable dated July 22, 2009 showed that the
US embassy in Baghdad welcomed the KRG’s initiative
but believed eradicating corruption would be
challenging.
“In this, as in other areas, the Kurdistan Region is
neither waiting for donor assistance nor bemoaning
the lack of international support - they have
decided to go out and buy their own advice. These
are positive steps so far.”
PricewaterhouseCoopers representatives told the US
embassy that even though the project was contracted
by the KRG, it was similar to a United
Nations-anti-corruption project and that it was the
first time in the team's experience that a
government had self-funded its own UN-like project.
However, the US embassy added, “The painful next
steps, including divesting the government of
conflict-of-interest business dealings, enforcing
new codes of conduct for government officials, and
prying the party away from the workings of
government will test the commitment of the KRG
leadership - whoever it may be.”
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