Weak Laws Bother Iraq Investors More Than Violence as U.S. Goes

Ahmed Jamal says it isn’t primarily Iraq’s violence that deters his company from investing in the country. It is its weak business laws.

“We don’t have factories or warehouses or anything like that,” said Jamal, regional sales manager for Istanbul-based beverage distributor Hayat Su, which brings bottled water to Iraq in trucks and works through a local representative. “The investment laws are not suitable.”

The U.S. yesterday formally ended its combat role in Iraq and inaugurated “Operation New Dawn” in which its main role will be to assist and train Iraq’s army. That shift, and the withdrawal of about 100,000 U.S. combat soldiers, leaves Iraq’s government to grapple with insurgent attacks and an economy devastated by decades of war and sanctions.

Seven years after the invasion that ousted Saddam Hussein, Iraq largely has been unable to revamp business laws that would help make the country more attractive to investors. Foreign direct investment totaled $1.1 billion in 2009, according to the United Nations July World Investment Report. Neighboring Iran, under a fourth set of UN sanctions, took in three times as much.

“Investors still note security concerns, but now are more likely to cite regulatory hindrances and other practical barriers to doing business,” the U.S. State Department said in its 2010 Investment Climate Statement on Iraq.

Most of the 2009 investment was in the oil industry, which according to the International Monetary Fund provides about 85 percent of government revenue. Iraqi officials say they are making efforts to diversify the economy, lessen reliance on oil and encourage investments.

Governing Coalition

For now, the country’s leaders are focused on competing for allies to form a governing coalition after inconclusive March parliamentary elections. Prime Minister Nuri al-Maliki’s State of Law bloc won 89 seats in the 325-member legislature while former Premier Ayad Allawi’s Iraqiyah group garnered 91. The new legislature met for the first time on June 14 and won’t meet again until the main blocs have agreed on distributing key posts.

Lawmakers in the outgoing parliament weren’t able to approve 72 draft laws meant to help accelerate economic growth, said Thair Feely, director of the government’s Baghdad Investment Commission.

Legislation awaiting approval includes a measure that would make it easier to register a company. “It can take four or five months and costs a fortune, about $15,000 to $20,000, compared to only 200 pounds ($300) in the U.K.,” Feely said by phone from Baghdad. “It’s unfair.”

Below Tajikistan

The World Bank estimates it takes an average of 77 days to open a business in Iraq, almost four times the average in the region. Iraq fell three places in the Washington-based bank’s 183-country ease-of-doing-business scale to 153rd this year, below Tajikistan and Haiti.

Issues such as a cash-based banking system, corruption and limitations on land ownership have also damped investment, said Arndt Fritscher of the Berlin-based Rebuild Iraq Recruitment Program, which works with 160 European, mostly German, companies with business interests in Iraq.

“The security situation is not our problem because we just pay more,” Fritscher said. “German industry is ready to go, but there is no basis to go from. We would like to set up power plants, for example, we just need the ground.”

Iraq’s National Investments Law of 2006 bars foreigners from owning land, though it was amended in November to allow non-Iraqis to buy property for housing projects. Berlin-based Transparency International, an anti-graft group, placed Iraq and Sudan in fourth to last place in its 2009 corruption index of 180 countries.

Shattered Infrastructure

Compounding these difficulties is the country’s shattered infrastructure. Electricity output in April was 8,000 megawatts, about half of national demand, government figures show.

The economy is estimated to have expanded 4.2 percent last year, the Washington-based IMF said, powered by oil exports. Companies including London-headquartered BP Plc, Royal Dutch Shell Plc, which is based in The Hague, and Paris-based Total SA, have signed contracts with Iraq to boost oil production after two bidding rounds for development rights last year, even in the absence of a hydrocarbons law. A third bidding round for natural-gas deposits is set for later this year.

“The oil business has such great profits and returns on investments that companies are willing to take risks,” said Ascanio Martelli, chairman of Bari, Italy-based Atami Group, which acts as a consultant for Italian energy companies working or seeking to work in Iraq, in a telephone interview.

Oil Reserves

Iraq has the world’s third-largest oil reserves and pumped 2.4 million barrels a day in July, up from 1.3 million at the end of 2003 and down from 2.6 million barrels at the end of 2000. The country is the world’s ninth-largest oil producer, according to the June 2010 BP Statistical Review of World Energy.

The government has pushed through some measures to attract investors. The National Investments Law exempts foreign companies from paying taxes for 10 years and from paying import fees for three years.

“We are trying to offer incentives,” Iraqi government spokesman Ali Al-Dabbagh said in an interview from Baghdad. “Our industries have many problems that do not encourage foreign investors or even local industrialists.”

Iraq needs $400 to 500 billion to get things back on track, according to the Baghdad Investment Commission’s Feely.

“Unfortunately, we only receive hopes and promises,” he said. “We can’t do it without foreign investment. We can’t do it on our own.”

To contact the reporters on this story: Nayla Razzouk in Amman at nrazzouk2@bloomberg.net; Caroline Alexander in London at calexander1@bloomberg.net.

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