The Kurdistan Region’s growth rate was 12% in 2012 and is predicted to reach 8% in 2013. The Region as a whole has a GDP of over $23.6 billion, with per capita income standing at $4.452. Approximately 55% of all investment in Iraq is taking place in the Kurdistan Region. According to Ministry of Trade and Industry reports, during the first quarter of 2013, more projects were underway in Kurdistan than were completed in all of 2012.
As a result of a favorable investment law, a burgeoning private sector, a forward thinking government, and a strong security environment, the Kurdistan Region continues to register impressive economic growth and now seeks to assert itself as a new investment hub in the Middle East. Indeed, the past decade has seen this once deprived and isolated area open itself to the world at an amazing pace. A variety of significant developments have facilitated this successful growth pattern.
For a number of years following the Kurdish liberation in 1991, there were two separate governments in the Region; one based in Erbil and headed by the Kurdistan Democratic Party (KDP) and one based in Slemani and headed by the Patriotic Union of Kurdistan (PUK). However, in early 2006, the two governments were unified, and the modern Kurdistan Regional Government (KRG) was formed. One of the priorities for that government was to create a legal foundation that could attract investment. A task force was implemented to identify the shortages or vulnerabilities in the investment climate (excluding the oil and gas sector), as well as the steps that could be taken to rectify those deficiencies. It was determined that a new law was needed to encourage more private sector participation and that a new physical institution was needed to oversee this development. As such, the Kurdistan Board of Investment (BOI) was established in 2006, with Herish Muharam installed as its Chairman. The mission statement of the new organization was simple: create new opportunities, provide professional services to investors, and work to rebuild all of Iraq through the Kurdistan Region. To accomplish these objectives, new legislative structures were also needed.
KRG Investment Law, Article 5
A Project shall be exempt from all non-custom taxes and duties for 10 years starting from the date of providing services by the Project, or the date of actual production.
Developing the Framework
The 2006 Investment Law, which was passed by the Kurdistan National Assembly and was ratified by President Masoud Barzani, remains one of the most important factors in the rapid economic growth that has been achieved over the last decade. The law stipulates that foreign investors can repatriate their profits in full, are equally treated under the law, are entitled to all the capital of any project, and enjoy the same rights as local investors to purchase and own land. In addition to these protections for foreign investors, the law establishes additional tax incentives and benefits to encourage foreign investment. Perhaps most notably, as a result of the Investment Law, the BOI was able to establish a streamlined licensing process that expedited the infrastructural development that was so necessary in the Region. The BOI awarded its first investment license in November 2006; in the seven years since, it has issued a total of 594 licenses with a total investment capital of $30.5 billion. Of those licenses, 526 were granted to local companies, 43 to foreign companies, and 25 to joint venture partnerships. Thus, both the 2006 Investment Law and the institutional oversight provided by the BOI have been integral in promoting the growth of the Region’s private sector, the cooperation of local firms with international companies, and the attention of foreign operators.
In 2012 alone, a total of 138 investment licenses were issued with a total value of approximately $6 billion; 77 licenses have been granted so far in 2013. Thus, 36% of all projects licensed by the BOI were authorized in the last two years alone, indicating that the infrastructure and economy of the Region continue to expand considerably. In an effort to promote further development, the BOI made the decision to decentralize, giving its branch offices in the three governorates of the Region increased licensing authority; a greater number of projects have been implemented as a result.
In terms of the economic areas impacted by this investment, of the 594 total projects authorized, housing remains the largest sector with 166 total projects (27.9% of all investment). However, as a result of the large number of housing developments under construction, the BOI made the decision to suspend housing licensing in order to focus on more critical areas, such as agriculture, tourism, and industry. Consequently, industry (136 projects constituting 22.9% of all investment), tourism (101 projects constituting 17.0% of all investment), and trading (87 projects constituting 14.6% of all investment) have come to the forefront. Despite being identified as a key area for expansion, the agriculture sector remains limited in its development, with 23 projects forming just 3.9% of all investment (sixth on the list behind the health sector).
Nevertheless, the $30 billion that has already been invested has gone a long way towards correcting many of the issues that plagued the Region prior to the creation of the Investment Law; no area serves as a better example of this fact than the electricity sector. In 2006, the Kurdistan Region was forced to import all of its electricity. Today, the abundant gas resources of the Region now provide a maximum of 2,800 megawatts (MW) of power, with plans to expand to 4,000 MW by 2014 and 6,000 MW shortly thereafter. Despite an increase in total consumers from 705,000 in 2009 to 1.1 million in 2013, Kurdistan now enjoys approximately 23 hours of power per day, in comparison to the rest of Iraq, which averages just 4 hours.
Oil and Gas Expansion
The abundant natural resources of Kurdistan remain at the heart of the Region’s burgeoning economy. In recent years, global energy leaders seem to have thrown their weight behind the Kurdistan Region. Indeed, majors like Chevron, ExxonMobil, Total, and Gazprom have expanded their operations in the Region, with ExxonMobil alone now having controlling interest in six different exploration blocks. Lured by the estimated 45 billion barrels of oil, 100-200 trillion cubic feet of natural gas, and the favorable production sharing contracts offered by the Ministry of Natural Resources (MNR), around 40 companies are now involved in the oil and gas sector of Kurdistan. Moreover, these companies have committed $10 billion of investment capital for the Region’s energy sector, thereby laying the groundwork for continued infrastructural and economic growth. To that end, a pipeline that will transport oil directly from the Kurdistan Region to the Turkish border (and the international markets beyond) is scheduled for completion in 2013. The new pipeline should reduce the disruptions caused by the current system of trucking oil to the Turkish border, and is expected to help the KRG achieve its export targets of 250,000 bpd by the end of 2013, one million bpd by 2015, and two million bpd by 2019. The Region currently has a refining capacity of nearly 130,000 bpd and is investing significant amounts in order to rapidly increase that number; to wit, over $15 billion has been invested in overall oil and gas development in the past decade.
Per the federal constitution, the Kurdistan Region is legally required to receive approximately 17% of the total budget of Iraq. However, because portions of that budget are first allotted to specific agencies within the Baghdad government, the KRG’s share tends to be closer to 11-13% of the annual federal budget. As such, the KRG budget for 2013 was approximately $13.1 billion, of which an estimated $2.5-$3 billion was allocated to funding investment projects across the three governorates of the Region. Similarly, the 2012 KRG budget was approximately $13 billion, with a $2 billion deficit.
Disagreements over the funds allocated by the federal budget have been at the heart of tensions between the KRG and the central government in Baghdad. The central government’s 2013 budget allocated $646 million to pay the oil and gas companies developing the Kurdish fields. This number was calculated based on the total expected oil production of 2.9 million bpd at a price of $90/barrel. However, the KRG had previously requested $3.5 billion in funding, largely as compensation for amounts previously owed by the central government. Despite these disagreements, the Iraqi Parliament was able to pass the 2013 budget, despite strong objections from Kurdish MPs. Disputes over budget allocations, as well as the KRG’s decision to begin exporting oil directly to foreign markets, are expected to continue to put a strain on Erbil-Baghdad relations.
With the BOI shifting investment emphasis from real estate and housing to tourism, agriculture, and industry, the landscape of licensed projects has changed considerably. Of the 136 industry sector projects that have been licensed since the BOI began its activities in 2007, a total of 58 (42.6%) were authorized in the past two years.
31 of the 138 total projects licensed by the BOI in 2012 were related to the industry sector. Thus far in 2013, industrial investment has constituted 35% (27 projects) of the 77 total licenses authorized. The majority of these projects have related to the production of steel, iron, aluminum, concrete, and plastic; this fact most likely demonstrates that there has been a shift towards local production of the necessary construction materials.
Despite these indicators, the industry sector within the Region remains limited. At present, Kurdistan faces a number of both internal and external obstacles that have prevented additional necessary development. As identified by BOI sources, a number of essential measures are absent, including a uniform trade and industry policy, modern technologies, and sustainable production. In addition, further entrepreneurial, managerial, and technical skills are needed.
Nevertheless, strides have been made to improve the situation to the extent possible. Local facilities are now capable of producing approximately 3,000 tons of steel per day, with plans in place to increase capacity to 1.5 million tons by 2016. Local production of concrete has seen similar advances, with the Region now having a capacity of 35,000 tons per day. Many credit the Region’s developing private sector with this growth, as the majority of these industrial operations were previously controlled by the government. With increased investment in both the facilities and the workers employed therein, both the conditions and capacity of these facilities have improved. Currently, the Ministry of Trade and Industry (MOTI) has targeted an increase in Region-wide capacity to 150,000 tons per day. This figure would allow the Region to begin exporting its construction materials to the rest of Iraq, as well as neighboring countries within the MENA region.
Approximately 55% of all investment in Iraq is taking place in the Kurdistan Region. According to MOTI reports, during the first quarter of 2013, more projects were underway in Kurdistan than were completed in all of 2012. Since 2006, over $14 billion worth of foreign direct investment has flowed into the Kurdistan Region. In 2012 alone, foreign companies invested around $5 billion into the economy of Kurdistan. Additionally, official figures indicate that there are currently 15,000 local companies and 2,300 foreign companies from 78 countries registered in the Kurdistan Region.
In terms of trade and investment, Turkish companies are top of the list. Approximately 80 percent of all goods sold in the Kurdistan Region are made in Turkey. In the real estate sector alone, investment by Turkish companies reached $4.3 billion in 2012. According to Sinan Çelebi, the KRG Minister of Trade and Industry, relations between the two parties have rapidly evolved in recent years: “In 2009, trade volume between Turkey and the Kurdistan Region totaled around $4 billion. In 2012, that number was $8.4 billion.” Sources at the MOTI also confirmed that bilateral trade between Turkey and the Kurdistan Region is expected to surpass $12 billion in 2013. In 2009, only 485 Turkish companies were registered in the Kurdistan Region. In 2013, approximately 1,500 Turkish companies are operating in the Region. These figures demonstrate that Turkish companies constitute over 65% of all foreign businesses operating in Kurdistan.
Iran also represents a critical trade partner for the Region, with the value of bilateral trade between the two sides estimated at $4 billion for the current year. The Parviz Khan border crossing (located in the western Iranian city of Qasr-e Shirin) attests to this growing relationship, as it was recently identified as the most active trade checkpoint of all the 86 crossings between Iran and Iraq. Iranian officials estimated that in the first four months of 2013, over 82,000 trucks crossed the Parviz Khan checkpoint from Iran into Kurdistan. In contrast, only approximately 250 trucks crossed from the Region into Iran. MOTI sources reported that the majority of items imported from Iran are food products, furniture, and carpets.
Kurdistan’s other leading trade partners in the Middle East are Lebanon and Egypt. In Europe, Germany stands as the Region’s strongest trade partner, although the KRG has also signed trade agreements with Italy, Poland, and the Czech Republic.
FOCUS: KRG & UNAMI Joint Trust Fund
In October 2013, the KRG and the United Nations Assistance Mission for Iraq (UNAMI) signed an agreement that will assist in the further development of the Kurdistan Region. The plan calls for the establishment of a Joint Trust Fund (JTF) meant to support the KRG’s growth policy that was effectively outlined in the Ministry of Planning’s, “Kurdistan Vision 2020 Development Strategy.” The fund will become operational in early 2014.
According to the UNAMI, “The Facility provides a mechanism for the KRG to draw upon expertise of the United Nations System to support the realization of development objectives for and implementation of development programs targeting priority sectors including health and social services, education, employment, physical infrastructure and economic development.” The agreement also stipulates that the KRG will serve as the primary funder of the JTF, with the UN operating as a principal co-founder. The JTF is expected to provide over $18 million in initial financing to support targeted projects and joint-venture programs.
In addition to providing funds for development, the JTF is also expected to allow for better resource mobilization and management for KRG-UN joint efforts, as well as provide for open and honest dialogue regarding development priorities. As stated by Dr. Jacqueline Badcock, the UN Coordinator in Iraq, “We are excited to team up with the Kurdistan Regional Government to work together on reaching the strategic development objectives of the Region and offer United Nations technical expertise to various Ministries.”