VZCZCXRO7124
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0148/01 0210732
ZNR UUUUU ZZH
R 210732Z JAN 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5284
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDC/USDOC WASHDC
RUCPCIM/CIM NTDB WASHINGTON DC
RUCNRAQ/IRAQ COLLECTIVE
UNCLAS SECTION 01 OF 04 BAGHDAD 000148
SIPDIS
SIPDIS
STATE FOR EB/IFD/OIA AND NEA/I-ECON
STATE PASS USTR
E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC IZ
SUBJECT: IRAQ -- 2008 INVESTMENT CLIMATE STATEMENT
REF: (A) 07 STATE 158802; (B) 07 STATE 163400
1. The following is Post's submission for Iraq's 2008 Investment
Climate Statement.
BEGIN TEXT
2008 INVESTMENT CLIMATE STATEMENT - IRAQ
Iraq's first post-conflict permanent government passed a National
Investment Law in October 2006, which was expected to open up its
economy to foreign investment. While the law is designed to give
Iraq a more investor-friendly business environment, much work
remains. Implementation of the law will be a challenge for Iraq in
2008. The Government of Iraq (GOI) continues to pursue some of the
economic reforms necessary to lead the country in a new direction,
including pension reform and reductions of the refined oil price
subsidy. Iraq's commitment to rejoin the international community
can also be seen in its steady progress towards World Trade
Organization (WTO) accession.
OPENNESS TO FOREIGN INVESTMENT
The Government of Iraq's (GOI's) Council of Representatives (CoR)
passed a National Investment Law in October, and the law was
published in the Official Gazette as Law No. 13 of 2006 on January
17, 2007. (Note: This law revokes CPA Order 39 on foreign
investment; it does not cover the oil and financial services
sectors.) The National Investment Commission (NIC) has not yet been
formed, nor has the CoR confirmed a Chairman of the commission.
Implementing regulations remain to be approved, and Provincial
Investment Commissions (PICs) have yet to be established in each of
the governorates. While the most recently nominated NIC Chairman is
seen as having a great deal of regional experience in attracting
foreign investment, he has not yet been confirmed by the appropriate
Iraqi authorities as at this writing. 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/. Once it is
implemented, the new law's provisions would provide an open
investment regime for foreign investors.
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 passed a Kurdish
investment law on July 3, 2006. 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, the regional law could become the only
applicable law in the Kurdish region. How this rule of federalism
will work in practice is still unknown.
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. However, it is
unclear whether currency convertibility is entirely free from
exchange restrictions. 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 and 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. The Central Bank of Iraq (CBI) can intervene, when
necessary, in order to maintain stability in the foreign exchange
market. 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 has implemented
effective monetary and exchange rate policies that continue to help
temper inflation.
EXPROPRIATION AND COMPENSATION
Iraqi law affords foreign investors some protection from
expropriation. 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 standard shall be regulated
by law. Although this standard may offer some protection to foreign
investments, the provision is skeletal, and a law 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 the investor states
in this area. The United States does not have a Bilateral
Investment Treaty (BIT) with Iraq.
DISPUTE SETTLEMENT
BAGHDAD 00000148 002 OF 004
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).
Although dispute resolution is laid out in Article 27 of the
National Investment Law, which details the rights of Iraqis and
foreigners with respect to Iraqi law, the absence of implementing
regulation makes uncertain application of the law 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 National Investment Law 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. The law
also allows in principle 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
The GOI is in the process of developing a new intellectual property
rights (IPR) law in line with the WTO Agreement on Trade Related
Aspects of Intellectual Property Rights (TRIPS), but the exact
structure of this and related legislation is still being determined.
IPR protection functions are spread across several ministries. The
patent registry and industrial design registry remain a part of the
Central Organization on Standards and Quality Control (COSQC), an
agency of the Ministry of Planning and Development Cooperation.
Copyrights are under the Ministry of Culture, and trademarks under
the Ministry of Industry and Minerals. The GOI's ability to enforce
intellectual property rights laws, however, is weak because of the
current security environment.
Iraq is also 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. Iraqi
government is still in the process of establishing its National and
Regional Investment Commissions as required under the National
Investment Law, a year after the law was officially published.
The absence of other laws in areas of interest to foreign investors
also creates ambiguity. Competition and consumer protection laws
that are critical for leveling the business playing field in the
market are needed. A competition law could help cut down on unfair
business practices such as price-fixing by competitors, bid rigging,
and abuse of dominant position in the market. A consumer protection
law that establishes definitions of unfair business practices would
be useful. While the Iraqis do not currently have a building code,
the GOI is currently evaluating this area.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
The Central Bank of Iraq (CBI) is responsible for conducting
BAGHDAD 00000148 003 OF 004
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.
However, the vast majority of banking operations are confined to
basic consumer transactions leaving the provision of credit to
individuals in private transactions. Channeling 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. In terms of true
financial intermediation, Iraq is seriously "under banked".
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. The payments system began limited operation in August
2006.
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.
This system does not always allow for full transparency in terms of
timing of market participants or knowledge of who has placed the
bid. The automation of the ISX, expected by the end of first
quarter, will provide much greater transparency as well as pave the
way for foreign investment on the exchange in terms of
dematerialized shares, easing the logistical burden of physical
certificates. In addition, a new permanent securities law is
drafted as well as rules and regulations for the Iraq Securities
Commission (ISC) and is expected to be introduced into Parliament in
early 2008. The status of the ISC is, however, in flux until a new
law is enacted.
POLITICAL VIOLENCE
Security continues to be the number one concern of the Iraqi
Government and interested businesses. The security situation in
Iraq remains serious. Theft and violent crime persist in Iraq. 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 have
been kidnapped, and several were subsequently murdered by terrorists
in Iraq. 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
carefully assess the situation in Iraq.
State Department's Iraq Travel Warning
(http://travel.state.gov/travel/iraq_warning. html) and Consular
Information Sheet (http://travel.state.gov/travel/iraq.html) contain
the essential security and safety information on travel to Iraq.
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.
The Commission on Public Integrity (CPI) 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. CPI
investigates nationwide allegations of corruption within the
government and refers cases to the Iraqi judiciary. It performs its
duties in conjunction with the Board of Supreme Audit (BSA) and the
Inspector 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
the statutory and regulatory provisions intended to control
corruption will require substantial revision to be effective.
BILATERAL INVESTMENT AGREEMENTS AND REGIONAL COOPERATION
Iraq is a signatory to thirty-two bilateral, and nine multilateral
agreements within the Arab League arrangements on Investments
Promotion and Protection (IPPA). Some of the bilateral agreements
with other countries include Afghanistan, Bangladesh, India, Iran,
BAGHDAD 00000148 004.2 OF 004
Japan, Jordan, Kuwait, 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.
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 creating
liberalized trade and increasing investment flows 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) finances a
variety of investment projects with substantial U.S. participation
in Iraq. Some of OPIC's basic programs include structured finance
projects, political risk insurance, investment funds and financing
for small and medium-sized enterprises. In addition, OPIC and the
Government of Iraq have executed an Investment Incentive Agreement
(IIA). The Iraqi Parliament has yet to ratify this agreement.
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.
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.
However, according to Free Zones Commission officials, goods
imported through FZs are still subject to Iraq's 5 percent tariff
when they leave the zone (expect for re-export).
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 and 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 Sulaymaniyah
Free Zone is located in northern Iraq in the Kurdish area. The
al-Qa'im Free Zone is on the Iraqi-Syrian border. It is close to
roads and railways that reach Turkey, Basrah, and Jordan. However,
none of these areas are operating as significant loci for investment
or trade, and only the Ninewa/Falafel zone has businesses operating
in it.
FOREIGN DIRECT INVESTMENT STATISTICS
According to the IMF, total foreign direct investment flows into
Iraq were $300 million in 2006, estimated as 0.7 percent of GDP.
Although data for 2007 is unavailable, final results will be
strongly influenced by the GOI's awarding of three mobile
telecommunications licenses in August 2007, priced at $1.25 bn each
for a total of $3.75 bn.
END TEXT
CROCKER