Controversy Over Foreign Investment Law

Tuesday, 22 February, 2005

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Salaam Jihad

Controversy is raging in Iraqi planning and business circles over the potential impact of economic reforms introduced by the US-led Coalition Provisional Authority, CPA, two months ago.

The controversy centres on the new foreign investment law enacted on September 19 by CPA administrator Paul Bremer, as well as plans to privatise Iraq's state-owned firms.

The law allows foreign investors the right to 100 per cent ownership of companies, to send profits out of the country free of taxation, and to lease land for up to 40 years.

Overseas firms will not be allowed to own key elements of Iraq’s nationalised oil industry, since the law explicitly rules out foreign ownership of “the natural resources sector involving primary extraction and initial processing”.

Opinions are sharply divided over the impact of the new regulations, and even about whether the CPA had the right to introduce them.

Finance Minister Kamil al-Gailani told a recent conference that a liberal law was needed so as to attract investment away from other states in the Gulf. Al-Gailani denied he was “selling out” the country, saying that such criticism showed a lack of understanding of the new laws.

Michael Fleisher, the CPA official in charge of promoting private development, acknowledged that healthy competition might cause some Iraqi businesses to fail, but he tried to reassure Iraqi businessmen by saying, “The best of you will survive.”

Other experts disagree. Sanaa al-Umari, professor of economics at Baghdad University, believes the law will leave no role for the Iraqi private sector. Al-Umari claims that private firms were “stunted” under the previous regime, and will be unable to compete with foreign investors.

Al-Umari thinks the law should be brought into line with investment legislation in other Arab countries, where foreign investors must have a local partner. That would enable Iraqis to develop the business skills needed to compete at international level, and not leave them to the mercy of the market after years of isolation.

In Baghdad’s trading districts, some merchants complain that the new law will allow foreign firms to come in and drive them out of business. Others fear that foreign economic interests are a danger to national security.

"Because of Ba’athist brainwashing, people regard foreign investment as the theft of our wealth," Governing Council member Samir al-Sumeidi was quoted as saying by the Baghdad newspaper al-Sabah newspaper on November 11.

Abu Hassan, who runs a cosmetics store off al-Rashid street, agrees with this view, saying the law will open the Iraqi market to "speculators" who will raise prices as they like.

As for repatriation of profits, Abu Hassan says “there must be state supervision or monitoring, otherwise they will steal our wealth and take it to their home countries”.

Abdel Hamid al-Rawi, manager of the Al-Nur General Trading Company, even thinks foreign companies will “serve American interests” by hiring Iraqis to “spy for them”.

Plans to privatise a large portion of Iraq's public sector companies meet with similar objections.

The policy would not require any new legislation since a privatisation law was enacted under the former regime. But Iraqis are sceptical, since Saddam Hussein used that law to sell off state firms to members of his family.

Yaqub Shonia, director general of the ministry of industry and mining, which controls much of the state sector, earlier announced that 52 companies would be "evaluated" to see whether they should be privatised.

Shonia said the timetable for the sale of state firms would be two years but that companies would be sold "only after making sure that the principles [of privatisation] are acceptable to the Iraqi people".

Few Iraqis are reassured by such claims.

Hana Abdelhussein, professor of economics at Baghdad University, predicts that the main Iraqi beneficiaries will be people who flourished under the old regime. He says they will use "capital [made] illegally at the expense of the Iraqi people" to buy up shares, or will be hired by foreign investors seeking to make use of their connections.

Abdelhussein also expects the privatisation process to be dominated by foreign buyers who will import workers to replace Iraqis at former state-owned firms.

As a result, Abdelhussein says the law will further exacerbate the unemployment crisis in a country where the jobless rate is already estimated at between 60 and 70 per cent.

For some observers, the real question is not whether the reforms will be effective but whether the CPA, as an interim administration of occupation, was legally entitled to enact them.

Thamer Razouqi, head of administrative commission for Iraqi businessman's association, acknowledges that the law “meets Iraq's economic needs" – but he says it should not have come from the CPA. “Bremer's law needs to be issued by a legal constitutional entity," he said, adding that his association will do its best to denounce the law.

Mohammed al-Mahdawi, a lawyer, agrees that the CPA was not in a position to introduce such a law, saying that “the order should have taken the form of a new law on investment, issued by the Governing Council”.

Whatever the legal questions surrounding the reform, even its supporters fear that they will not be enough to stimulate investment, since potential buyers are likely to be deterred by the uncertainties of post-war Iraq.

Amal Shalash, head of economic studies at the Beit al-Hikma research centre, acknowledges that loose ownership requirements, tax breaks and incentives might exert a “calming influence” on investors worried by Iraq's current chaos.

But she thinks the law will ultimately fail simply because of the “political and regional stability [issues] that will face the foreign investor, in particular the absence of security".

Salaam Jihad and Osama Redha are trainee journalists with IWPR in Baghdad.