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Cablegate: Kurdistan Region's Investment Law Attracts Little

VZCZCXRO5973
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2923/01 2431258
ZNR UUUUU ZZH
R 311258Z AUG 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3121
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 002923

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EINV IZ TU
SUBJECT: KURDISTAN REGION'S INVESTMENT LAW ATTRACTS LITTLE
FOREIGN DIRECT INVESTMENT TO DOHUK

REF: BAGHDAD 2844

1. (U) This is a Kurdistan Regional Reconstruction Team
(RRT) cable.

2. (SBU) BEGIN SUMMARY: The Dohuk Governorate has received
little new foreign direct investment (FDI), following
enactment of the Kurdistan Regional Government's (KRG)
Investment Law in mid-2006. Although the law is materially
more liberal than the Iraqi national investment law in
several key respects, foreign investors remain scarce.
Dohuk's weak infrastructure, relatively small population, and
primitive banking system (representative of the banking
situation throughout the KRG) pose material impediments to
FDI. Senior economic officials in Dohuk recognize these
constraints and express open disappointment with the FDI sums
entering the governorate. Given Dohuk's constraints on
economic development -- some self-created by the provincial
government, some imposed from without, and some based on
geography -- we believe Dohuk will attract relatively low
levels of FDI and exhibit slower economic development than
the remainder of the Kurdistan Region. END SUMMARY.

------------------------------------------
KRG Investment Law Offers Attractive Terms
------------------------------------------

3. (SBU) PRTOff met private sector leaders and senior
government officials on August 16 in Dohuk City, in order to
discuss the KRG Investment Law of July 2006, as well as the
current economic state and outlook of the Dohuk Governorate.
The KRG Investment Law has more attractive terms and
conditions than both the Iraqi national investment law and
similar laws in other developing countries. It allows 100
percent foreign ownership of land and does not prohibit
ownership of banks and insurance companies, while the
national investment law prohibits any degree of foreign
ownership in all three areas. The KRG law also explicitly
states that the regional government will bring basic services
(water, electricity, sewage, public road access and
telecommunications) on a cost-free basis up to the boundary
of a foreign investor's project site, while the Iraqi
national law makes no such offer. Both laws offer foreign
investors ten years of income tax exemption, unhindered
repatriation of project investment funds and accrued profits,
and other attractive financial incentives.

--------------------------------------------- -
But Dohuk Governorate Fails to Lure Investment
--------------------------------------------- -

4. (SBU) Even with a liberal foreign investment law and
consistently good security conditions, the Kurdistan region
has not been able to attract the level of foreign investment
the KRG expected. The Kurdistan Region's underdeveloped
banking system hinders the ability of the Dohuk, Erbil and
Sulaymaniah Governorates to attract significant foreign
direct investment, especially from countries other than
Turkey (reftel). Problems in the banking sector -- and the
cash-based economy that results from them -- continue to
restrain capital investment and growth across virtually all
economic sectors in the Kurdistan Region.

---------------------------
Constraints on FDI in Dohuk
---------------------------

5. (SBU) While Dohuk suffers from many of the same investment
impediments affecting the entire Kurdistan Region, unique
local constraints have hampered FDI even further. Compared
with its larger sister provinces in the Kurdistan Region --
Erbil and Sulaymaniah -- Dohuk has a much smaller population,
lacks an international airport, and remains more highly
dependent upon the flows of electricity, goods and
construction expertise from Turkey. NOTE: Turkish nationals
account for approximately 80 percent of the FDI flowing into
Dohuk Governorate. END NOTE.

6. (SBU) Dohuk Governorate's population of approximately
900,000 is by far the smallest of the KRG's three
governorates. In addition, the province lacks, and has no
firm plans to build, a commercial airport. This diminishes
Dohuk's attractiveness to foreign investors, as they must
travel by road into and out of Dohuk City. The trip typically
entails a commercial flight to or from Erbil, and a three
hour ride over back roads between Erbil and Dohuk City. The
fastest route between Dohuk City and Erbil runs through
Mosul, but investors consider it too dangerous to use.

7. (SBU) As Dohuk remains the Iraqi province most dependent
on Turkish goods, investment and expertise, reports of a

BAGHDAD 00002923 002 OF 003


potential Turkish cross-border operation disproportionately
impact Dohuk's economy. Turkish government threats of major
military operations against the Kurdistan Workers Party (PKK)
present in Dohuk recently reduced the traffic of both goods
and investment into the Kurdistan Region. According to a July
2007 report from Embassy Ankara, the government of Turkey
reports that the flow of exports to northern Iraq slowed
significantly in May and June, while Turkish media has
reported that ten percent of Turkish companies in northern
Iraq have left the region.

8. (SBU) Public and private sector leaders in Dohuk told
PRTOff they need to diversify their province's economy away
from dependence upon Turkish imports of all varieties, in
order to decrease Turkey's economic and political leverage.
However, efforts to source non-Turkish FDI and foster
development of home-grown industries have generated little
success. According to the Dohuk Governorate's Director
General of Investment, Bakhtyar Ameen, about 80 percent of
Dohuk's FDI continues to be sourced from Turkish investors
who maintain 100 percent ownership of their projects. Ameen
confirmed that "most (foreign) investors go to Erbil or Suly
(Sulaymaniah)," as those governorates have larger populations
and better developed infrastructures.

9. (SBU) Although crime rates are low and no coalition
casualties have occurred in Dohuk since the start of
Operation Iraqi Freedom, no insurers operate in Dohuk. FDI
has been negatively impacted by this lack of basic insurance
coverage. Investors are unable to locally procure the forms
of coverage that often accompany FDI, including insurance
against business interruption, commercial property damage,
personal casualty, vehicle damage and other basic types of
insurance.

--------------------------------------------
Governorate Policies and Attitudes Limit FDI
--------------------------------------------

10. (SBU) The same Dohuk government that seeks to attract FDI
hinders development of a thriving private sector and its
related investment opportunities by serving as the province's
largest employer. The Dean of Dohuk University's College of
Administration and Economics, Dr. Khalil Besfki, told PRTOff
that approximately 70 percent of the government must shift
its expenditures toward improving the province's
transportation and basic services infrastructure, while
establishing mechanisms to transition government workers into
private sector jobs. He said the Kurdistan Region's economic
potential is also degraded by "a lack of economic planning"
by the government, low participation of women in the
workforce (less than 10 percent of working-aged women in all
districts of the governorate, according to Besfki), and the
government's inability to produce meaningful economic
statistics that could guide potential investors or
entrepreneurs.

10. (SBU) The Chairman of the Dohuk City Chamber of Commerce,
Ayad Abdulhalim, wants Dohuk to use its mountains and
relatively remote location to its advantage. He believes
Dohuk's economic future lies in development of a tourism
industry that caters to Arabs from southern Iraq and beyond.
However, the KRG has formally relegated Arabic language
instruction to a tertiary priority (after Kurdish and
English) in primary and secondary schools, thereby degrading
the ability of Dohuk citizens to attract and satisfy Arab
tourists who would someday venture north to Dohuk's mountain
resorts.

11. (SBU) While Arab investors from southern Iraq and the
Persian Gulf states could potentially provide the non-Turkish
FDI sought by the Dohuk Governorate, Ameen indicated to us
that Arab investors are not highly welcomed. He claimed that
Arab investors are only interested in the southern part of
Iraq, due to language and cultural ties, and Ameen clearly
preferred investment from Europe and the United States. He
expressed frustration at being unable to attract such
investment from the West, and he declared himself a "one man
shop" in an understaffed office. He said, "Where are the
American companies? Not a single one has invested here since
the invasion in 2003."

-------
Comment
-------

12. (SBU) In Dohuk and the other two provinces of the
Kurdistan Region, no U.S. or coalition force member has been
killed by hostile fire since the March 2003 invasion of Iraq,
while all other Iraqi provinces have witnessed deadly
attacks. Despite this lack of violence against coalition

BAGHDAD 00002923 003 OF 003


personnel and other foreign citizens, FDI inflows remain
tepid and have disappointed the KRG. While publicly welcoming
Turkish investors and construction companies, senior
government officials in Dohuk privately express trepidation
about the high impact of Turkish government actions and
policies on the province. Efforts to diversify Dohuk's FDI
inflows away from Turkey remain constrained by the province's
relatively isolated location on the Turkish border, its
limited and unstable basic infrastructure, and the province's
unenthusiastic outreach to potential Arab investors. With its
many challenges in attracting FDI -- some imposed from
within, some from without, and some from its geographic
isolation - we believe Dohuk's economic development and level
of FDI investment will continue to lag behind those of its
larger and better developed sister provinces of Erbil and
Sulaymaniah. END COMMENT.


CROCKER

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