Foreign Investment In Iraq’s Basra Runs Into Problems

Basra in southern Iraq has always been the main business hub of the country. It has the only access to the Persian Gulf and contains the vast majority of the nation’s oil and gas reserves. Today, it receives just over one-third of all investments in the country, and that amount is dramatically increasing. The problem is that far too many of these deals fall through because of government red tape, lack of coordination, the country’s limited banking capacity, and corruption.

(Agence France Presse)

In February 2011 the Dunia Frontier firm released a report that found that private investment in Iraq almost doubled in 2010. Last year, 156 companies pledged $42.668 billion to Iraq, a 48.7% increase from the $28.7 billion in 2009. The leading sectors foreign businesses put their money into were real estate, transportation, electricity, industry, and oil and gas. Baghdad received 39.8% of all investments, closely followed by Basra with $14.702 billion, or 34.5% of the total. In May 2011, the Basra Investment Commission announced around $174 million in new investment in the province. These reports only covered monies promised however, not actually appropriated.

The problem with too many announcements about investments in Basra, and Iraq in general, is that they too often fail to actually materialize for a number of reasons. In June 2011 for example, the Basra Investment Commission said that it had agreed to 40 development projects since it was founded in 2008, but more than half of them were never implemented. The Commission stated that one major problem was that companies could not get land allocated to invest in. In Basra, the Oil Ministry owns most of the land because of the province’s huge oil and gas deposits. Iraqi law prohibits foreign companies from owning land in many cases. The government has tried to change the legislation, but has largely failed. In October 2006, parliament passed a law that allowed investors to lease land for 50 years. (1) That was followed by an amendment to the 2006 Investment Law that allowed foreign companies to own land for housing projects. In December 2010, a similar decree was issued to allow investors to own land for housing, and leasing for other types of investment. None of these have helped, because there are still other laws that restrict land use by investors. (2) The government also lacks adequate land dispute regulations, and trained staff to implement the new laws. Another problem with the bureaucracy is that it is too slow in issuing visas for foreign workers. The oil companies in Basra especially have complained about this. A consulting engineer working in the province told the press that an additional issue is the lack of coordination between the provincial and central governments. In April 2011, the Electricity Ministry signed a $204.4 million deal with the Chinese National Machinery and Equipment Import & Export Corporation to build a 500 megawatt power plant in Basra in 19 months. This was touted in the province, but then the head of the electricity committee on the provincial council found out that Baghdad never signed the final deal with no explanation, so the company never started its work. Like the rest of the country, corruption is a major impediment. Hundreds of building companies have sprung up in Basra since the 2003 invasion. The Basra Chamber of Commerce claims over 1,000 building contractors registered with it. The problem is that many of these are fake businesses connected to politicians. This hurts investment because these are the types of firms that foreigners would look for as subcontractors to do construction work, but too many of them are simply firms set up to steal money. Finally, Iraq’s banking sector is severely limited. In July 2011, the Electricity Ministry complained that the country’s financial institutions lacked the necessary assets for foreign companies to use them. Other issues included most transactions having to take place in cash, the lack of electronic banking, and no interbank and international payments. All of those mean that companies can’t get the financing that they need nor easily transfer their money. Together, these explain why so many deals have fallen through in Basra. The government and laws are not supportive, corruption is rampant, and the country’s banks can’t handle the demands of foreigners.

The World Bank ranked Iraq as one of the least business friendly countries in the world not long ago. Basra is a perfect example why. More and more companies are interested in investing there, but so many of them fail to accomplish their goals because there are so many barriers to completing a successful deal. Its the average Iraqi that suffers because the country is so in need of development. It has gone through thirty years of wars, sanctions, invasion, and civil war. The infrastructure is a wreck as a result, and there is high unemployment and underemployment, especially for the youth. That’s why Basra and the rest of the nation needs foreign money so bad.  Until the government changes its practices a large number of companies and Iraqis are going to be disappointed because agreements will continue to fall through, failing to bring the jobs, improved services, and new businesses to Iraq that so many are looking forward to.

FOOTNOTES

1. Iraq, “Investment Authority, Iraq: the lack of powers and the old law impede the work of investors,” 4/28/10

2. AK News, “Iraqi investment board says non-committed companies will be banned,” 4/24/10

SOURCES

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