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RR RUEHBC RUEHDA RUEHDH RUEHKUK
DE RUEHGB #1882/02 1931503
ZNR UUUUU ZZH
R 121503Z JUL 09 ZDK
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3895
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 02 OF 03 BAGHDAD 001882 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EAGR IZ TU IR EAID PGOV
SUBJECT: RRT ERBIL:  FDI DOES NOT MEET KRG EXPECTATIONS 
 
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* Missing Section 001 * 
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BAGHDAD 00001882  002 OF 003 
 
 
and that entrenched bureaucracy often impedes delivery of the law's 
promises.  Ameen sometimes spends months shuttling paper to the 
various officials who have to sign off on a project before it can be 
licensed, and says that many potential investors do not want to 
waste time working their way through this convoluted process.  He 
says that poor coordination within the KRG further complicates the 
licensing process.  For instance, the investment law is able to 
offer investors freehold land ownership because the KRG Ministry of 
Municipalities is the regional "landowner" and can allocate land in 
accordance with the KRG's priorities.  But agricultural land is 
specifically managed by the KRG Ministry of Agriculture, which has 
recently made the decision to grant ownership of the land to the 
Kurdistani farmers who have been working it for generations. 
(Comment: Prior to this decision, land was farmed on a multi-year, 
renewable lease.  End Comment) Once the land no longer belongs to 
the KRG, the BoI no longer has the authority to unilaterally grant 
that land to an agricultural investment project.  It must buy the 
land from the farmer on behalf of the investor, which is time 
consuming.  Because of such bureaucratic delays, investors often 
choose to circumvent the BoI and work directly with specific line 
ministries, or to work with local partners who they believe will 
navigate the process more quickly using their personal connections. 
 
 
¶6. (U) KRG officials and Kurdistani businessmen acknowledge other 
challenges, including: 
 
¶7. (U) Lack of Infrastructure:  The KRG lacks a network of modern 
roads to connect the three provinces of the KR, and to connect 
investors to potential areas for development, such as touristic 
sites in rural, mountainous areas.  24/7 electricity is not 
available and both businesses and homes rely on generators for large 
portions of the day. "No one is going to open a factory in a place 
where they have to buy diesel fuel everyday just to guarantee the 
electricity with which to operate," said the Kurdistani owner of an 
import company in Dohuk. 
 
¶8. (U) Lack of Banking and Insurance Services: KRG officials and 
local businessmen also acknowledge that a weak regulatory 
environment and the lack of modern banking systems undermine 
investor confidence, as do minimal insurance services.  Ayad Ahmed, 
Chairman of the Dohuk Chamber of Commerce, acknowledged that weak 
local banking system (in which even Kurdistanis have little faith) 
is compounded by the lack of internationally-recognized banks.  "Our 
people do not trust or use the local banks, but we do not have good 
alternatives.  We are a cash economy, but major investors do not 
deal in cash."  Though insurance is available through a few foreign 
brokers, it is more expensive to purchase through a reinsurer than 
it is to buy locally.  One of these foreign brokers says that until 
the KRG implements a law that requires insurance, the market will 
not produce enough demand to support a viable local insurance market 
(reftel). 
 
¶9. (U) Lack of Skills: BoI Chairman Muharram recognizes that a 
dearth of skilled labor deters potential investors.  Many investors 
seeking industrial projects - such as factories - are discouraged by 
the lack of qualified employees.  Comment:  The KRG investment law 
does permit foreign investors to import labor, if there are no 
qualified Iraqis to fill the position.)  Dr. Asmat Khalid, President 
of the University of Dohuk, attributes this lack to the KRG's 
failure to balance its emphasis on tertiary academic education with 
the Region's need for vocational training.  Furthermore, Chamber of 
Qthe Region's need for vocational training.  Furthermore, Chamber of 
Commerce Chairman Ahmed says, most young people aspire to government 
jobs, not the private sector.  "They have been taught since they 
were young people to study hard and get nice government jobs.  That 
is all that they know." 
 
¶10. (U) A Limited Consumer Market:  The Kurdistan Region consumer 
market is small. While the KR purports to be the "gateway to Iraq," 
there are relatively few instances of companies successfully 
establishing themselves elsewhere in Iraq based on their start in 
the KR.  In fact, many firms who have chosen to work in the KR have 
experienced direct and indirect resistance from GOI institutions 
regarding the commercial engagement strategies in Iraq as a whole. 
 
¶11. (U) Lack of Vision: Muharram acknowledges the KRG's lack of a 
strategic plan for the type of FDI that it would like to attract. 
This has led to scattershot investment, rather than a structured, 
recruitment effort that would build the economy in steps that will 
support further investment.  Muharram believes a better strategy 
would be for each line ministry to determine and present to the BoI 
a list of their sectors' developmental gaps.  The BoI would then pay 
for feasibility studies, pre-license projects, and take them abroad 
for potential investors' consideration.  "In this economic crisis 
and with the lack of knowledge that the investors have of Kurdistan, 
we cannot just sit in our offices and wait for people to come to us. 
 We must go out with concrete proposals in our hands!" 
 
Foreign Investors Sound Off 
--------------------------- 
 
¶12. (U) Foreign investors cite additional concerns: 
 
 
BAGHDAD 00001882  003 OF 003 
 
 
¶13. (U) Opaque Business Practices and Cronyism:  The KRG has yet to 
adopt a consistently transparent system of contracting, frustrating 
investors who feel that their bids have not received fair 
consideration.  Some potential investors complain of being "strongly 
encouraged" to work with Kurdistani (silent) partners in order to 
gain enough business to become profitable.  Some of these Kurdistani 
partners ask for exorbitant fees (51% of profit earned) in exchange 
for their services, which may dissuade small-scale investors. 
 
¶14. (U) Variable KRG Support: Still other foreign investors say that 
the KRG occasionally defaults on the support that it promises to 
investors.  For instance, the KRG promised fertilizer for the 
private equity group the Marshall Fund to give to Kurdistani farmers 
who agreed to work with their tomato paste plant in Sulaimaniyah. 
The KRG failed to deliver the fertilizer, forcing Marshall Fund to 
purchase fertilizer out of its own budget in order to keep the 
project on track.  While Marshall Fund believes this to be the cost 
of doing business in a transitional economy and has the operational 
budget to adapt to such changes, other investors may not. 
 
Seeking Increased American Training and Investment 
--------------------------------------------- ----- 
 
 
¶15. (U) Both the KRG and Kurdistani business community are asking 
for help.  BoI Chairman Muharram acknowledges that the KRG lacks the 
experience in attracting and managing FDI that western, developed 
economies have, and has requested USG-sponsored training and support 
for his staff.  Similarly, the Chambers of Commerce of all three KR 
provinces frequently request greater partnership opportunities with 
American firms. (Comment: Since 2007, the U.S. Foreign Commercial 
Service has facilitated the travel of over 100 Kurdistani company 
representatives to trade shows in the U.S.  The U.S.-based Enterra 
Solutions group has been hired by the KRG to provide training in 
project planning, project risk management and contract 
negotiation.) 
 
¶16. (U) COMMENT: The KRG offers attractive terms for foreign 
investors and has much to show for it.  High-rise apartment 
buildings constructed by foreign companies and luxury imported car 
dealerships abound in the well-manicured and peaceful streets of the 
capital cities of the three KR provinces.  There is clearly Western 
interest in the Kurdistani market, and numerous investors have 
expressed excitement at the possibility of getting in on the ground 
level in a Region which is just taking off in terms of natural 
resource exploitation.  But until the KRG deals with these 
impediments, it is unlikely to attract the level of FDI that it 
needs to generate the jobs and economic stability that come from a 
strong and diversified private sector.  END COMMENT 
 
HILL