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Iraq: opening the door to foreign investment.

Given the news coverage in Iraq over the past five years, one can readily understand the predisposition of most to dismiss the notion of investing in Iraq for the foreseeable future. But Omar Al-Saadoon from Al Tamimi & Company provides an alternative perspective on the economic opportunities and developments taking place, and the investment laws in the country

The title of this article may make most readers sceptical as to considering Iraq as a viable and possibly even a profitable market for foreign investors. This article, however, looks at business opportunities in Iraq and internationally, based on experience in advising multinational clients on substantial projects with the Iraqi government, personal involvement with Iraqi government ministers and frequent dealings with my Iraqi colleagues.

The current investment laws of Iraq will also be outlined and the Federal Free Zone law for those ?braveheart? investors who take seriously the repeated message coming from both the central government in Baghdad and the Kurdistan regional government.

The message is that Iraq has lucrative opportunities across most economic sectors and for those investors who are prepared to do business, they are more likely than not to be viewed favourably by the authorities in relation to public sector investment projects in the long term.

The article would not be complete without briefly addressing the proposed and long awaited draft Federal Oil and Hydrocarbon Law which, once enacted, will substantially help to create the economic and legal conditions necessary for large scale foreign investment in Iraq?s oil and gas industry and afford Iraq the much needed revenue to fund and spearhead Iraq?s reconstruction and accelerate its economic rehabilitation.

Economic opportunities

Kurdistan region

Areas in the Kurdistan region offer pockets of growth and relative stability. The Kurdistan region is eager to attract investment in agriculture, mining, tourism and real estate investment. Future plans of the Kurdistan regional government include an aviation academy, cargo village and international exhibition hall.

Iraqi workforce

Iraq has a largely educated and skilled workforce. Prior to the Iraq-Iran war, which ended in 1988, Iraq was widely acknowledged in the Middle East as a country poised to become the first industrialised nation in the Arab world.

Given the current high rate of unemployment amongst Iraqi males, foreign investment would be able to benefit from the relatively cost effective labour force which in turn would lower the risk exposure of deploying expatriate staff to Iraq (at least for the foreseeable future) and gain grass root support from Iraqis for the local economic benefits ? that is increased purchasing power through larger salaries stimulating demand from local trade.

Oil reserves

Iraq, after Saudi Arabia and Canada, possesses the third largest untapped oil reserves in the world. It has been proven Iraq is capable of producing at least 115 billion barrels. It is also estimated there is up to another 100 billion barrels of oil reserves in the Western desert of Iraq. Iraq?s sanctions period ensured oil exports were kept to a minimum.

Through experience in advising a global multinational company in the oil MAY and gas industry who is negotiating a technical services contract with the Iraqi Government, it has been noted that even though it may be seen as an economic stop-gap measure pending ratification of the draft Federal Oil and Hydrocarbon law, it is designed to boost existing and potential oil production in certain parts of Iraq.

Gas reserves

In respect of gas reserves, Iraq possesses a formidable 110 trillion cubic feet of gas in addition to 150 trillion cubic feet in ?probable reserves?. Only 61 of 119 gas and oil-fired turbines installed in the country?s 29 power generating facilities are in working order.

Iraqi Dinar

The anticipated increase in oil production will give the Iraqi government an increased budget to allocate to the various ministries on public sector projects, as well as reducing Iraq?s foreign debt, which in turn will strengthen the value of the Iraqi Dinar. The Iraqi Dinar is steadily gaining on the US Dollar as Iraq?s central bank manages upward float on billions from oil exports and spending through the Iraq Development Fund. The investor should note that Iraq?s external debt is currently expected to reduce to $32 b towards the last economic quarter of 2008. Forex reserves at Iraq?s central bank are currently estimated at $18 b.


Regarding telecom?s potential, Internet services remain largely under-penetrated and overlooked (it is estimated that there are only 1.2 million phone subscribers). Telecom mobile licenses have recently been granted to international consortiums by the authorities and it is anticipated this trend is likely to continue if not increase.

Water and wastewater opportunities

In relation to water and wastewater opportunities, there are 250 cities in Iraq and treatment plants cover only 6 percent of the population. There is virtually no sewerage in rural areas, where about 30 percent of the population lives.


There at least 104 airstrips and airports in Iraq. International airports exist in Baghdad and Basra, while domestic airports exist in Mosul, Kirkuk and Erbil. The investor may be interested to note that $250 m has been initially invested in a new 16 gate terminal at Erbil International Airport which will open up international trade routes and accordingly investment opportunities in the North. The central government has also recently entered into a contract with Boeing to purchase 40 new aircrafts and with Bombardier to purchase 6 new aircrafts. This signals a commitment to open Iraq?s skies to international commercial and passenger routes, which effectively does away with the ?no-fly zone? policy during the sanction years.

Southern region

Iraq has six ports in the South, the largest being Umm Qasr in Basra. This port in particular has been rehabilitated and has berthing areas and the facilities to store cargo and containers moving equipment and support vessels. Umm Qasr has already witnessed traffic increase and countries such as Kuwait and the UAE have openly expressed their willingness to act as both regional shipping and investment hubs to those ports, given their proximity to Iraq, historic trading relations and their established shipping industry.


Iraq has more than 2,454 km of rail lines and 107 stations, much of it in dire condition. There are current plans by the Ministry of Transport to rehabilitate train stations across major routes and to upgrade existing major railway lines such as the route from Basra to Baghdad and Baghdad to Mosul and Ninevah.

Given the recent lucrative tenders of railway lines and stations in Arab countries such as Saudi Arabia, this economic sector, with its strategic importance, is likely to attract considerable interest from investors. I was recently involved in advising on a tender from an Iraqi state-owned enterprise for the procurement of railway carriages.


Iraq has over 38,000 Km of roads and highways most of which were built in the 1970s and 1980s. With heavy military use and conflicts these highways are now in poor condition and in need of repaving. I give as a personal example a journey I undertook to Baghdad in 2004 using the highway between Amman and Baghdad in 2004 which contained several large craters owing to American bombardment.

The Iraqi stock exchange

The ISX, as it is commonly known, has a current market value of $2 b. Trading prices are inevitably linked to the security situation but volumes have increased over 200 percent between 2006 and 2007. Given the problem of corruption and the lack of information in the market, most of the funds invested are in the banking sector, which represents over 65 percent of the total market. Investors should be interested to note that over 60 percent of trading on the ISX is driven by foreign investors.

Strategic risk management

Partnering with Gulf Cooperation Countries

It should not be overlooked that companies in the Gulf region offer a practical and realistic alternative to foreign investors deciding to ?go it alone? in a hostile economic environment.

Companies in the Gulf region are familiar with the language, tribal mentalities and different cultures that constitute Iraq and, equally important, the Iraqi legal system and Federal law which are substantially similar to countries such as the UAE and Kuwait.

Project insurance

Investors should note insurance underwriters are now able to offer ?political risk cover? for contractors? plant and equipment. The scope of insured risks now insured include war, civil war, terrorism, abandonment, expropriation and deprivation (inability to re-export) and even kidnappings. This type of insurance is likely to help lower and manage the risk profile of investment projects in Iraq.

It is worth noting that various government ministries have issued conditions of contract which will assist to create a proper basis upon which to negotiate contractual risks associated with the type of aforementioned risks including provisions for arbitration.

The Multilateral Investment Guarantee Agency

The MIGA, which is an offshoot of the World Bank, now affords foreign investors greater protection from the effects of Iraqi government decisions which may negatively impact on their investments, for example losses arising from an investor?s inability to convert local currency (capital, interest, profits etc) into foreign exchange for transfer outside Iraq and losses due to the destruction, disappearance, or physical damage to tangible assets caused by politically motivated acts of war, civil disturbance, insurrection, coup d??tat, terrorism and sabotage.

Whilst Iraq is a signatory to the MIGA and has passed local legislation to give effect to MIGA under Iraqi law, Iraq?s full membership to MIGA currently remains pending owing to administrative procedures which remain to be fulfilled by the Iraqi Government.

Investment laws of Iraq

Legislation has recently been enacted by the government of Iraq and the Kurdistan regional government in Northern Iraq with the intention of attracting and encouraging foreign investment in all of Iraq?s regions. It should be appreciated these laws are significant, since prior to the occupation of Iraq, foreign entities, save Arab nationals, were not legally permitted to invest directly in Iraq, or establish and hold shares in Iraqi registered companies.

Federal investment law

Under Article 138 of the draft Iraqi Constitution of 1991, the new investment law no. 13 of 2006 was enacted. This law was passed to support the process of establishing investment projects in Iraq, to foster increased economic and social development and create work opportunities for Iraqis.

This federal law entitles both a foreign investor and Iraqi national to invest in an economic activity which results in a legitimate benefit for Iraq. Therefore all areas of investments shall be subject to the provisions of this law except investments in oil and gas extraction and production, and investment in the banking and insurance sectors.

Foreign investors may now enjoy the same rights and privileges as those granted to Iraqi entities. They now have the right to invest, own shares, and trade in Iraq. The law also provides guarantees against confiscation, and further guarantees free movement of foreign capital.

The benefits offered to the investor specifically include:

Right of repatriating capital brought into Iraq including any profit made on the capital invested.

The right to exchange shares and bonds listed in the Iraqi Stock Exchange.

Form investment portfolios in shares and bonds. The reader may be interested to note I was involved in advising a major international bank on the issue of derivatives in Iraq under Iraqi law.

Ability to rent land required for the project for the duration of its lifecycle, provided the lease period does not exceed 50 years.

The ability to insure an investment project with any foreign or national insurance company the investor deems suitable.

Opening accounts in Iraqi or foreign currency or both at a bank inside or outside Iraq for the licensed (approved) project.

The right to employ and use non- Iraqi workers in case it is not possible to employ an Iraqi with the required qualifications and capable of performing the same task.

10 year tax and duties exemption.

Kurdistan?s Investment Law

Law no. 4 of 2006 was the first new foreign investment law to be passed in Iraq and is aimed specifically at foreign investments in the Kurdistan region. This law covers a variety of business sectors including manufacturing, communication and transport, and infrastructure, including construction.

This law offers, substantially, the same benefits as the federal investment law (described above) but interestingly also allows investors to purchase, as opposed to rent plots of land (excluding, of course, those which contain oil and gas and other valuable resources).

The Kurdistan law also permits dispute resolution by arbitration under laws applicable in the region or international conventions of which Iraq is a member.

Iraq?s economic free zones

Definition of a free zone

A free zone is a nationally designated area (primarily non-residential), which is outside the legal and regulatory jurisdiction of the customs and excise authorities of a country. A free zone is basically used by companies to store goods and establish various industries for export purposes. Customs officials have the right to enter free zones in order to search for prohibited goods. Free zones are subject to quarantine laws and those relating to security.

Importance of a free zone

One can easily look to the thriving economy of the United Arab Emirates where free zones play an important part in attracting foreign investment across a variety of economic sectors. The reader may be interested to note the Dubai International Financial Centre, which houses one of our firm?s offices, is a landmark and distinct economic free zone which has helped to attract some of the world?s most recognised companies and institutions.

Iraqi law enacting free zones

The enactment of free zones in Iraq was established pursuant to law no. 3 of 1998 and operates under the instructions for Free Zone Management and the Regulation of Investors? Business no. 4/1999.

Iraqi current free zones status

As a result of the invasion in 2003 and the collapse of the Baath regime, free zones, like other areas and institutions in Iraq, were subjected to sabotage and looting but on the whole have since been rebuilt and rehabilitated.

The reader may be interested to note the following:

Khor Al Zubair - Effectively operational. It is located 40 km from Basra and has access to the Arabian Gulf through the port of Khawr-az-Zubair. Its area is 1 sq km and its expansion area is 18 sq km.

Ninevah/Flaifil - Effectively operational. It is located in the north of Iraq to provide road and rail access to Turkey, Syria and Jordan. Its area is 4,900,000 sq m.

Al Qa?im - Operations are currently suspended due to the presence of multinational forces. The Iraqi government is in the process of coordinating with US forces for an evacuation of multinational forces from Al Qa?im. Its location is near the Syrian- Iraqi border. It is also close to road and rail networks leading to Turkey, Jordan and Basra. Its area is 300,000 sq m.

Baghdad - Under construction. Work has been suspended for security reasons.

Al Sulaymaniyah, Kurdistan - Currently under negotiation with the Kurdistan regional government.

The benefits of investing in a free zone include:

No tax on capital, profits, customs duties and investment income from investments during the lifecycle of the investment.

No income tax on income earned by non-Iraqi nationals working in the free zones.

Exemption from all import and export restrictions with the exception of goods which are exported from the free zones to the rest of the country for domestic consumption.

Exemption of 50 percent of income tax earned in the free zones by Iraqi nationals.

Investors are permitted to bring construction materials for their projects into the free zones.

Permission to open banks to serve investors (under specific guidelines).

Resident Iraqis are allowed to transfer their savings into the free zones.

Permitted economic activities within a free zone include:

Industrial activities: production, assembly, installation, sorting and refilling process (commercial and domestic use).

Assembly, installation, sorting and repacking.

Storage, re-export and trade.

All types of service-based activities including banking, transport, foreign exchange, and insurance.

Current prices for leasing land to investors in the free zones

According to the Commission of the Free Zones, affiliated to the Iraqi Ministry of Finance, in July 2007, the prices quoted below (reflecting an exchange rate based on the proposed but yet unratified Iraqi government budget for 2008 which assumes 1,260 Iraqi Dinars to the US Dollar) are indicative of land prices in Iraq?s free zones, depending on the investment activity undertaken:

a) Commercial and service projects:

Paved land @ US$ 3/ sq m per annum

Unpaved land @ US$ 2/ sq m per annum

b) Industrial projects:

Paved land @ US$ 3/ sq m per annum

Unpaved land @ US$ 1.5/ sq m per annum

Draft Federal Oil and Hydrocarbon Law

The enactment of a federal Iraqi law aimed at permitting foreign investment in upstream oil and gas development remains one of the most important and pressing questions facing the current Iraqi government and foreign investors.

Pending the enactment into law of a new federal law which is currently awaiting debate in the Iraqi parliament for the second time, owing to recent allegations of political interference with the wording of previous drafts, the Iraqi Ministry of Oil has been trying to send the message out to foreign oil and gas companies that it is prepared to do business.

Whilst the issue of passing a new federal law is fraught with complexity, given constitutional ambiguities owing to issues revolving around control and allocation of oil and gas revenue, there would appear to be consensus in principle between most major political parties in Iraq that foreign investment in the oil and gas industry in Iraq is vital for Iraq?s future. This assertion is made on the basis that oil and gas revenue will, to a large extent, fund a currently constrained federal budget, reduce Iraq?s debt obligations, fund reconstruction, strengthen the Iraqi Dinar, lower unemployment, lower inflation, raise land values, and generally spearhead Iraq?s economic rehabilitation.

Given the government?s desire to engage international oil and gas majors in its industry, the Iraqi Ministry of Oil is currently negotiating (as a ?stop gap measure? pending the enactment of a new federal law), up to five technical service contracts to foreign oil and gas majors. The purpose of such contracts is aimed at boosting oil capacity and production in certain oil fields. I am currently advising on a technical service contract and understand they are intended to be a precursor to a much larger number of contracts dealing with oil exploration and production, which the Ministry of Oil intends to award foreign investors in the upstream oil and gas industry once the new federal law is passed.

It is anticipated a draft of the new federal law is due to be debated in the Iraqi parliament this summer and it remains to be seen whether the law will be passed this time. I suspect a decision from Iraq?s Supreme Court on the legality of the Kurdistan regional government awarding oil contracts may be a determining factor in this process.


An investor?s typical approach to any prospective investment is primarily dictated by their attitude to risk. The risks of currently doing business in Iraq are high, particularly given the security situation in certain parts of the country and the problem of corruption within the Iraqi government and public administration.

However, current economic indicators and legal developments now offer investors more cause for optimism since the occupation five years ago. The Iraqi government has recently passed legislation encouraging foreign investment across different economic sectors. Most notably the Ministry of Industry and Minerals has awarded contracts this year to consortiums, under new investment legislation for foreign investors to rehabilitate state owned cement factories, with an official approximate aggregate value of $500 m.

A conference is due to take place in Dubai later this year following a similar conference held last year in Dubai to attract large scale foreign investment in Iraqi economic sectors including petrochemicals, construction and industry. I understand delegates to the conference will include international companies in the property development, investment banking and steel sectors.

An independent body on public integrity, responsible for enforcing antibribery and corruption laws and public service standards has been enacted which has full authority and powers to impose substantial fines, prison terms and the confiscation of gifts on officers employed within the government.

The Central Bank of Iraq has gone on record stating the inflation rate has hit 12 percent in December 2007 as opposed to 65 percent a year earlier and that the downward trend of inflation is statistically the lowest Iraq has experienced in the last 17 years.

The Ministry of Oil is intending to enter into technical service contracts with international oil and gas companies to boost oil production, which will help increase funds for the federal budget as well as strengthen the Iraqi Dinar. This development may be seen as the precursor to revitalising Iraq?s oil and gas industry.

The general level of security in areas notorious for the level of violence has decreased over the past six months, though the continued cooperation of Iraqi political stakeholders, in my opinion, remains key to continuing this trend.

Project insurance and the MIGA now, for the first time, offer investors the ability to insure commercial risks in doing business in Iraq. The reader may be interested to note that the World Bank is currently working on a stimulus package for Iraq which it plans to roll out soon, though details at this stage have not been officially released.

Iraq is not yet a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). The Iraqi Government should take heed of actions taken by other countries in the region such as the UAE who have recently ratified this treaty, given the importance to investor confidence in the sanctity of the arbitration process and the cross-enforcement of arbitral awards between member states.

Yes, the volatile situation in Iraq remains precarious at best, particularly given the continued military occupation. Whilst the problems besetting Iraq are unprecedented in the region?s recent history, it should also be remembered, so are the opportunities for doing business in Iraq.

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Publication:SMB Advisor Middle East
Geographic Code:7UNIT
Date:Aug 2, 2010
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