December 18, 2007

Iraq’s first post-conflict permanent government passed a new investment law in October 2006, opening up its economy to foreign investment. While Iraq is making great strides to develop a more investor-friendly business environment, much work remains. Inflation and stagnant economic growth will be challenges that Iraq will need to overcome in 2007, but the Government of Iraq (GOI) is in the process of making the necessary economic reforms to lead the country in a new direction. Pension reform and further reductions of the refined oil price subsidy are just a few of these economic policies. In addition to passing a new investment law, Iraq’s commitment to rejoin the international community can also be seen in its progress towards World Trade Organization (WTO) accession.

Openness To Foreign Investment

The Government of Iraq’s (GOI’s) Council of Representatives passed a new investment law in October, and the Presidency Council subsequently approved the law in November 2006. The law must next be published in the Official Gazette to take effect. (Note: This law revokes CPA Order 39 on foreign investment. End note). Implementing regulations will be the next step. In addition, the GOI will need to stand up a national Investment Commission and establish offices in each of the governorates, including the Kurdish region. A copy of this law can be obtained from the U.S. Department of Commerce Iraq Task Force website – www.export.gov/iraq/. The new law opens up Iraq’s economy to 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 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 currency is fully convertible and can be exchanged freely with any other currency. The new investment law allows investors to bank and transfer capital inside or outside of Iraq, which provides considerable flexibility for foreign investors.

The Government of Iraq’s monetary policy since 2003 has focused on maintaining price stability and a stable exchange rate. 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.

Expropriation And Compensation

Iraqi law affords some protection to foreign investors from expropriation. Article 23 (Second) of the new 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. 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. (Note: The United States does not have a Bilateral Investment Treaty (BIT) with the GOI at present. End Note). Article 12 (Third) of the new Iraqi 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.”

Dispute Settlement

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 Arab League 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 new investment law, which details the rights of Iraqis and foreigners with respect to Iraqi law. Domestic arbitration is also provided for in Articles 251-276 of the Iraqi Civil Procedure Code. Arbitration agreements must 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 new GOI investment law allows 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 exchange shares and bonds listed on the Iraqi Stock Exchange. The new law also allows 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 increases to fifteen years if the Iraqi investor share is more than fifty percent of the project.

Right To Private Ownership And Establishment

The new GOI 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 form investment portfolios in shares and bonds.

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 functions are currently 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 member of several international intellectual property conventions, and of 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 new national investment law establishes a legal framework for investment. Potential investors, however, 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. The Iraqi government is still in the process of establishing its national and regional commissions. In addition, implementing regulations are still needed for the investment law.

The absence of laws in areas of interest to foreign investors also creates ambiguity. This absence includes competition and consumer protection laws that are critical for leveling the business playing field in the market. 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 would establish the ground rules for firms concerning what actions could be considered unfair business practices directed against consumers. 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 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. The vast majority of banking transactions, however, are confined to basic consumer transactions rather than business loans. There are also 20 private banks (see CBI’s website – www.cbiraq.org). Three foreign banks have also been licensed in Iraq.

The Trade Bank of Iraq (TBI) was established as an independent government entity under CPA Order No. 20 in 2003. TBI's main purpose is to provide financial and related services to facilitate the importation. The payments system began limited operation in August 2006, with five banks participating. It is anticipated that by year-end another six to eight banks will begin to participate as well.

The new GOI investment law allows for foreign investors to exchange shares and bonds 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 coming automation of the ISX will provide much greater transparency as well as pave the way for foreign investment on the exchange. In addition, a new permanent securities law is being drafted as well as rules and regulations for the Iraq Securities Commission (ISC). 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 can 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 convoys en-route to venues, hotels, restaurants, police stations, 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 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 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 acts as an enforcement arm of Iraq's anti-corruption laws, and 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, 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

The GOI has drafted a new labor law, which is under review by the Prime Minister’s cabinet. Iraqi labor law remains weak in promoting a flexible, business-friendly employment environment. The existing Saddam-era law includes regulations that require revisions, including: 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 new investment law states that priority in employment and recruitment shall be given to Iraqis, but does not establish any quotas. In addition, foreign investors are expected to help train Iraqi employees as well as to raise their efficiency, skill, and capabilities. Separate from the new law, 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. Capital, profits, and investment income from projects in the FZ are exempt from all taxes and fees throughout the life of the project, including in the foundation and construction phases.

Activities permitted in Free Zones include: (a) industrial activities (both production and consumer), 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 Free Zones. The Basrah/Khor al-Zubair Free Zone is one million square mile 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 400,000 square miles and 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-Qayam Free Zone has two sections located near the Iraqi–Syrian border. It is close to roads and railways that reach Turkey, Basrah, and Jordan.

Foreign Direct Investment Statistics

Total foreign direct investment flows into Iraq were $300 million in 2004. U.S. investment in Iraq was $142 million in 2005. Foreign investment into the U.S. from Iraq during this same year was zero.

Source: US Department of State (Original Article)