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