Investment a "success story" in Iraqi Kurdistan

ARBIL, Iraq Wed Sep 29, 2010 9:36pm EDT

1 of 4. Residents play at a bowling hall in Iraq's northern province of Arbil September 25, 2010.

Credit: Reuters/Azad Lashkari

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ARBIL, Iraq (Reuters) - While most Iraqis struggle under the detritus of a seven-year war, the people of Arbil in Iraqi Kurdistan can frolic in a public pool, ride an elevated cable car over freshly planted parkland or escape stifling heat in a new ice skating hall.

The new luxuries of Iraq's northern Kurdish region seem a world apart from the dust and grit of Baghdad, where suicide bombers are an everyday fear, dirt-gray blast walls dominate a war-weary cityscape, hotels are shuttered, leisure confined to home and the city's own telepherique lies in ruin.

The relative security of semi-autonomous Kurdistan, largely unaffected by war, has made it a safe haven in an oil-abundant country that presents an enticing but uncertain profile to a business looking to invest.

"The telepherique idea I brought from China. It cost me $2.5 million to build and it was constructed by a Chinese company," said Mamdouh Mahmoud, the businessman behind the cable car and skating rink in central Arbil.

"I'm paying $2,500 per year as rental fees for the land I leased from the government to build the skating hall and telepherique station, so who could resist the temptation to invest here?" he said.

TOO DANGEROUS?

Stunted by a generation of war, sanctions and neglect, Iraq is one of the world's most compelling emerging markets.

It sits atop proven oil reserves of 115 billion barrels, the world's third largest, and its estimated 30 million people are starving for housing, electricity and consumer goods.

But the war that started with a U.S. invasion to oust Saddam Hussein is not over, and Iraq remains a place entered at risk.

Islamist militants are still active. Bombings and other attacks kill hundreds each month.

A new survey of business executives by the Economist Intelligence Unit found 64 percent believe it is still too dangerous to do business in Iraq, even though more than half said their view had become more positive in the last two years.

Kurdistan won the highest marks within Iraq -- 46 percent had highly or somewhat favorable views of the region with only 20 percent unfavorable.

In Arbil, the only blast walls in evidence are the brightly painted ones surrounding the parliament. The capital of Iraqi Kurdistan has clubs, restaurants and a feeling of safety that allows residents to stay out after dark.

Investors are eyeing the region as an end in itself or an entry point for the rest of Iraq, when the rest of Iraq is safe.

The sounds of construction are everywhere in Arbil as new houses and apartment blocks sprout. Investors have committed $14 billion since mid-2006, according to government officials.

"This has been a major success story for Kurdistan. We're proud of that," Prime Minister Barham Salih told Reuters in an interview in July.

Business leaders point to a key 2006 investment law that helped transform Kurdistan from a centrally planned economy under Saddam to a more trade-oriented, investor-friendly region.

It offers a 10-year tax exemption and free land to business owners, with the right to transfer profits outside the region.

TURKISH INVASION

The Kurds are reaching out to European and American investors but at present 55 percent of the foreign companies investing there -- 640 of 1,170 -- are from neighboring Turkey. By comparison, only 31 are German and two are French.

"Kurdistan is a lot more viable for the small and medium-sized companies that want to operate in Iraq but cannot afford to spend the thousands of dollars in security costs needed to operate successfully elsewhere in the country," said Ali Al-Saffar of the Economist Intelligence Unit.

Security concerns may not stop a company from investing in Iraq, but the cost of protecting facilities and people from a stubborn insurgency must be factored into business plans.

Electricity transmission towers and Iraq's oil pipeline to Turkey have been frequent targets.

"There are financial allocations for the security issues. This is an additional cost," said Khalid Jameel, proposals manager for Uruk, a Dubai-based company that won an $84 million contract to build a power plant in Taji, 20 km north of Baghdad.

The company has 60 security guards stationed at the site for 100 engineers and technicians. It put up a barbed wire fence around the property until a permanent wall is built.

TANGLED BUREAUCRACY, CORRUPTION

Iraq has massive infrastructure plans on the drawing board.

Global oil majors have committed to multibillion-dollar contracts to develop oilfields and the government, funded 95 percent by oil revenue, allocated $21 billion, a quarter of its budget, to housing, rail and other projects this year alone.

Corruption and bureaucratic snarls remain major impediments.

A World Bank report ranks Iraq 153 of 183 nations for ease of doing business. Transparency International's corruption index has it 176th of 180 nations.

Infrastructure battered by 30 years of nearly constant war also holds back development. Baghdad residents say they get only a few hours a day from the national power grid.

Kurdistan, little touched by the current conflict, does better, supplying more than 18 hours a day.

"Only four or five years ago, we had only one hour of electricity per day," Trade and Industry Minister Sinan Chalabi said. "I think within two or three years' time we shall overcome all our shortage and we will have extra."

Iraqi Kurdistan also has big infrastructure projects in the works, some focused on neighboring Turkey to boost annual trade from the current $5-6 billion. Chalabi points to a single bridge between the countries that handles 1,500 trucks a day.

"We have made an agreement to build two extra bridges and to expand the width so we can stand the extra (traffic)," he said.

But disputes between Arbil and Baghdad are hindering growth on both sides.

The federal government says contracts the Kurdistan Regional Government signed with oil firms to develop its fields are illegal. The spat shut down exports from Kurdistan last year and the two capitals have been unable to resolve their differences.

"We are losing billions of dollars a year from not exporting oil from Kurdistan," Salih, the prime minister, fumes.

SAFETY FIRST

Kurdish authorities boast on their website that not a single coalition soldier was killed, nor a single foreigner kidnapped, in Iraqi Kurdistan during the war.

That kind of security has Kurds reveling in new amenities. Khalid Nawzad, a 22-year-old worker at Arbil's bowling alley, says residents stand in line for a chance to play.

"I wish all other parts of Iraq could enjoy some leisure, but I know it's nearly impossible under the current bad security," he said. "I wish one day violence will vanish and life will become normal."

(Additional reporting by Ahmed Rasheed and Aseel Kami in Baghdad; Writing by Jim Loney; Editing by Samia Nakhoul)

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