Interview, part I of II: Kurdistan presents investment opportunity

Interview, part I of II: Kurdistan presents investment opportunity

This is the first of a two-part interview with Brady Jewett, Kurdistan Region Project Editor at Invest in Group, a publishing and research consultancy in partnership with the Kurdistan Regional Government to promote investment in the Region.

1) Let’s start broadly: Why do you think investors should come to Iraqi Kurdistan?

There are several reasons. To begin, the policy environment is very welcoming of foreign investment. The 2006 Investment Law passed by the Kurdistan Parliament provides foreign investors in the Kurdistan Region full ownership of their operations, 10 years of tax-free operations, the ability to repatriate all earnings, relaxed local content policies and, for high-priority sectors, free or subsidized land.

Because of the Region’s history, opportunities are quite broad. Years under the dual sanctions regime meant decades of stagnation until recently, so the rebuilding effort touches all sectors.

Kurdistan historically had a thriving agriculture sector, which was destroyed by the Baath regime. Much of the Region’s fertile land is still fallow, while a huge majority of the Region’s food is imported. Information and communication technology (ICT) infrastructure is still being established, hospitals and pharmaceutical companies are opening and growing, and schools and universities are expanding quickly to keep up with the Region’s demographic growth.

Access to finance, historically limited, is improving with the expansion of local banks and the entrance of foreign banks. In almost all sectors, development started from an extremely low point, which offers significant opportunity for businesses willing to invest here. While economic data in the region is imperfect, estimates of annual GDP growth in the Region have hit 12% in recent years, and the KRG’s Ministry of Planning is targeting 8% annual GDP growth through 2016.

In the energy sector, the region’s production sharing contracts (PSCs) offer upstream energy companies major incentives to explore and produce hydrocarbons in the Region—particularly compared with the less lucrative technical service contracts (TSCs) offered to oil companies in the more mature oil fields of southern Iraq. There is also significant investment potential in the downstream energy sector, with several billion dollars of investments currently being made in electricity generation and oil refining.

Finally, many Iraqi and foreign companies use the Region as a ‘gateway to Iraq’, by establishing their headquarters in the Region, to conduct business in the larger Iraqi market.

2) Despite the fairly stable security situation in Kurdistan, many prospective investors are still unclear about the semi-autonomous status of the Kurdistan Regional Government (KRG), especially when it comes to the validity of contracts Erbil signs. The Iraqi central government even banned ExxonMobil from a 2012 auction and called into question its existing contract, and has blacklisted Dutch trader Trafigura as well, both for penning agreements directly with Kurdistan. How risky a proposition is a contract with the KRG?

This issue is largely isolated to the energy sector. As the Iraqi Parliament has been unable or unwilling to pass a unified hydrocarbons law, the Kurdistan Region passed their own hydrocarbons law in 2007 and has been signing exploration and production (E&P) contracts unilaterally with international oil companies (IOCs).

While this has indeed been controversial, it appears that IOCs feel that it is a risk worth taking—the Region has signed 60 PSCs, involving over 50 stakeholders from 23 countries. These companies include the world’s largest, such as ExxonMobil, Shell and Total. As the KRG has a monopoly on the Region’s politics and security, the threat of expropriation of the blocks by Iraq’s federal government is minimal.

I will also note that, despite threats from the federal government, several oil companies active in the Region have continued their activities in southern Iraq without interruption, such as Total, Gazprom and Shell.

3) Even though Kurdistan is a much safer zone than other parts of Iraq and the Middle East, last September’s bombing in Erbil began to sow fear in locals and foreigners alike that the sectarian violence—which the rest of the country is long accustomed to—might finally be spreading north. Should investors be worried? 

The incident was notable largely because it was such an anomaly. There have only been two of such incidents since 2007—in contrast to the near-daily violence in Baghdad, Mosul, Kirkuk and Anbar province. Business as usual was restored almost immediately. Kurds and foreigners in the Region have a lot of faith in the Region’s Asayish and Peshmerga, the security forces and military of the KRG. I would argue that the Region’s security situation is more an asset than a liability for investors here.

4) As you know, the new Kurdish government has yet to be formed, even though elections took place in September 2013. Kurdish President Masoud Barzani maintains that a government will take shape before April 30th, when national parliamentary elections are scheduled. But that pledge looks shakier by the day. What does this political instability mean for the average investor?

I share your skepticism that a new government will be formed before the April 30th elections. However, for the average investor, I doubt that the lack of a government is affecting business in a significant way. The most senior positions in the KRG are likely to stay the same and, for most foreign investors, partisan politics is of relatively little consequence. The most notable element of the September 2013 election was the fall of the PUK and the rise of Gorran, an opposition party and offshoot of the PUK. While the results will almost certainly mean fewer PUK positions in the KRG, the government is likely to be led by a KDP-PUK coalition, similar to that of the previous government.

5) Despite these clear challenges, Kurdistan still has strong investment figures, with certain key sectors, such as housing, which have experienced booms in recent years. Erbil can boast about $37 billion in total investment, increasing year on year over the last seven years. However, three-quarters of that is from local investors. Why has the KRG been unable to woo more outside capital?

The KRG as it currently exists is very young. Sanctions were only lifted in 2003, the investment law was only passed in 2006 and most of the KRG’s foreign representations were established in the late 2000s. Given this backdrop, foreign investment in the Region has been impressive and is quickly growing. Investment from the UAE, Turkey and Lebanon is already quite established.

Emaar, the company behind Downtown Dubai and the Burj Khalifa, the world’s tallest building, has begun a $3 billion development project in Erbil, and Turkish and Lebanese banks have a significant presence in Erbil, largely to finance Turkish and Lebanese FDI. France’s Orange Telecom and Ooredoo, a major Qatari telecom, are major investors in Korek Telecom and Asiacell respectively, both Kurdish mobile operators. Standard Chartered, the UK bank, recently opened a major office in Erbil. Nearly all of Erbil’s premier hotels are international.

That said, it is true that the largest investors in Kurdistan are local. Major local companies such as Faruk Group, KAR Group, Falcon Group and Qaiwan Group are undertaking some of the Region’s largest projects. This is to be expected—they have been present in Kurdistan and Iraq for longer. They are all well-established, they have local expertise and they have longstanding local connections. As Kurdistan develops and the KRG’s outreach is further developed, there is certain to be increasing foreign investment in the Region.

6) Let’s shift toward investment opportunities and protection. There has been news of a proposed free zone near Slemani that would afford foreign investors a number of tax incentives and locational benefits. What is its status?

There is an industrial zone established outside of Slemani, with several factories already in operation. The zone currently primarily houses factories in heavy industry—cement, bricks and steel—and has developed something of a niche in that area. Cement and bricks from Slemani are now used throughout Iraq, and five enormous new steel plants are currently under development, which will be among the largest in the MENA region.

The Slemani Chamber of Commerce is planning extensive expansion of the industrial zone, and hopes to have as many as 100 factories operating in the area in coming years. There is some degree of foreign investment in the industrial zone, including a major cement plant operated by Lafarge, the French cement giant.

Also notable is a free zone that is currently under development in the town of Zakho, which is on the Kurdish/Turkish border, near Dohuk. This is notable, as trade and investment with Turkey is a huge strategic asset of Kurdistan and Iraq. The free zone has been negotiated by Turkish and Kurdish officials, and should open soon, bringing increased Turkish FDI to the Region.


Brady Jewett is Kurdistan Region Project Editor at Invest in Group, a publishing and research consultancy focused on frontier markets. The views expressed here are his own, and do not necessarily reflect the views of Invest in Group.

About Author

Kevin Amirehsani

Kevin is a Denver-based policy and public engagement consultant. He was previously the head of operations for a solar energy startup in Lagos, researcher for the US Commercial Service in Cape Town and the Institute for Democratic Governance in Accra, and Peace Corps volunteer in Cameroon. He holds an MSc. in International Political Economy from LSE along with a B.S. and B.A. in Industrial Engineering and Political Science from UC Berkeley.