Iraqi Kurdistan still a tough sell to investors

ARBIL, Iraq (Reuters) - Iraqi Kurdistan has been primed for a wave of foreign investment for years, but officials say the grand goals of a relatively peaceful northern enclave are frustrated by violence plaguing the rest of Iraq.

Kurdish men work on the construction site of a big hotel in Arbil, 310 km (190 miles) north of Baghdad August 27, 2008. REUTERS/Azad Lashkari

Kurdish officials dream big, speaking of bringing Europeans to ski the region’s snow-capped peaks, building modern schools and hospitals and rejuvenating thirsty wheat fields.

In Arbil, the Kurdish capital some 310 km (190 miles) north of Baghdad, the streets buzz with activity. Several upmarket hotels and housing projects are going up on the outskirts of town. Direct flights arrive from Europe and westerners are a common sight in the city centre’s booked hotels.

“We have many things: oil, iron, phosphate,” said Baqi Salaye, a Kurdish businessman sipping sweet tea in an elegant, gold-trimmed reception room in Arbil’s chamber of commerce.

Yet Salaye, who dabbles in aviation, tourism and other business, echoes widely felt frustration when he bemoans the muddled perceptions of outsiders, who often fail to notice that Kurdistan has been largely been spared the bloodshed in Iraq.

“If something happens in Mosul, they say ‘northern Iraq.’ If it happened in Diyala, they say ‘northern Iraq,”’ lamented Karim Sinjari, Kurdish state interior minister, referring to northern areas that fall outside the Kurds’ autonomous region.

“So -- someone sitting in the United States -- you see the news and you cannot differentiate.”

Kurdistan, closely allied with Washington for years, seemed poised to flourish after the U.S.-led invasion in 2003 toppled Saddam Hussein, the unflinching leader who had waged war against minority Kurds and slaughtered civilians en masse.

Since a new investment law was issued in 2006, promising investors a 10-year exemption from non-customs taxes, Kurdistan has licensed over 100 investment projects, said Nawroz Muhammad Amin, a senior official at the region’s Investment Board.

Investments in housing, tourism, industry and other sectors, not including oil and natural resources, total around $16 billion from 2006 through mid-2008, she said.

About 16 percent of that was foreign investment, 25 percent Iraqi and foreign partnerships, and the rest local. Among outsiders, Arab companies have so far led the pack.

Damac, a developer from the United Arab Emirates, plans to begin work this year on a small city of residential, commercial and recreational properties near Arbil worth at least $6 billion, aiming to attract returning Iraqi exiles.

But Western investors are arriving more slowly, which frustrates Muhammad Amin.

“We visit different countries. We have an investment law. We have the government Web site, and ads on Arabic channels,” she said, throwing up her hands.


Even before Iraq violence dropped sharply in the last year, the Kurdish government aggressively courted investors, branding itself ‘the other Iraq’ and wooing clients in foreign capitals.

Timothy Mills, president of the American Chamber of Commerce-Iraq, said most U.S. companies have so far stayed away from Kurdistan because they don’t fully understand the balance of risks and benefits of doing business there.

“The perception in American boardrooms is informed by the (U.S. State Department) travel advisory, by what is seen on TV,” Mills said. “Degrees of uncertainty.”

Another red flag is the fighting between Kurdish PKK rebels in the mountainous area near Kurdistan’s northern edge and Turkish forces on the other side of the border.

“The Kurdish government is trying a lot, but some things are not in our hands,” Sinjari said. He urged the United States and Britain to relax travel policies discouraging would-be visitors.

The U.S. State Department, in its most recent advisory, strongly warns U.S. citizens against traveling to Iraq, ticking off a litany of threats: rocket attacks, kidnappers, thugs -- and the PKK, which Washington considers a terrorist group.

But Sinjari hopes a change in such policies, at least for Kurdistan, would encourage business travelers and tourists.

U.S. officials say foreign investment across Iraq has also been hindered by a lack of confidence in its overall regulatory regime. They expect change with the passage of an oil law in Iraq, which has the world’s third largest proven reserves.

The Iraqi cabinet passed a draft of the law in 2007, but a final version has been bogged down in a number of disputes, including whether Kurdistan will have the power to sign oil contracts on its own and who will control reserves there.

Also contentious is the status of oil contracts the Kurdish government has already signed, which Baghdad deems illegal.

Kurdish oil reserves amount to 45 billion barrels, officials say. Many have also long dreamed of making the oil-rich city of Kirkuk, just to the south, part of Kurdistan.

Such oil disputes have stopped the world’s biggest international oil companies from investing in the Kurdish region’s oil and gas reserves, for fear Baghdad will blacklist them from deals in the rest of the country.

Earlier this year, the central government halted oil exports to Austria’s OMV and South Korea’s SK Energy after the companies signed oil deals with Kurdistan.

Privately, western officials also point to another deterrent to greater investment in Kurdistan -- fear of corruption and lack of trust in contracts signed with local partners.

Indeed, many businessmen mutter complaints about the formidable sway of Kurdistan’s KDP and PUK parties, which each control a swath of the region around Arbil and Sulaimaniya, in the private sector.

Yet Mills said local officials were mindful of the need “for Western companies to adhere to anti-corruption standards.”

Editing by Sara Ledwith