Iraq is currently undergoing extensive transformation in its economic and legal sectors and relevant institutions. Arguably, the foundation of Iraqi restoration is based on two fundamental pillars which to date have not materialized: The first is political stability and the second is the introduction of a solid and harmonic legal framework supporting the vital sectors of Iraq’s system, such as the oil, gas and banking industries, that will attract the required foreign investment.
Legal framework
Iraq has always been a country rich in contradictions and intricacies. The country’s legal framework embodies these complexities. For example, under Saddam Hussein no private ownership of natural resources was permitted and foreign investments were not encouraged unless one was dealing with Arab investors, as evidenced by the Law on Arab Investors No. 62 of 2002.
The vestiges of protectionism and patriotism have not been fully eradicated in the post-Saddam era. Article 25 of the new Iraqi constitution approved in 2005 contains language “guaranteeing the reform of the Iraqi economy in accordance with modern economic principles to ensure the full investment of its resources, diversification of its sources, and the encouragement and development of the private sector.” Article 26 provides that the state shall guarantee the “encouragement of investment in the various sectors.” In practice such provisions have not been fully implemented.
Investments in Iraq are governed by the 2006 Iraqi National Investment Law (No 13). Article 10 of the law has been highlighted by various commentators, as it provides that “The Iraqi or foreign investor enjoy the same privileges, facilities, and guarantees, and submit to the obligations stated in this law.”
However, this article is inconsistent with Article 11, which states that “the foreign investor shall enjoy the following benefits, the renting or leasing lands needed for a project, provided it does not exceed 50 years, renewable with the agreement of the national investment commission.” Hence, the ownership rights of foreign investors are different and it emphasizes some weaknesses in the legislative text and the need for further clarification.
On the side of progress, the layers for reconstruction have been paved, albeit slowly. Iraq is party to a significant number of international agreements and international conventions, including: the Permanent Court of Arbitration, the International Standards Organization, World Intellectual Property Organization (WIPO), United Nations Convention on Contracts for the International Sale of Goods (CISG, entered into force for Iraq in 1991) and the United Nations Convention against Corruption (2008). Iraq’s accession to these agreements and conventions suggests a modest level of intent towards progress and internationalism.
Gordian knots
Failure by Iraq to consolidate a solid legal framework has already dampened the spirits of would-be investors, amounting to an unquantifiable, but undoubtedly large, cost for the country. In spite of some adherence to international law standards, an endemic lack of transparency and corruption still raises the eyebrows of investors and lawyers alike.
The introduction of new laws has been extensively delayed and the government has been blamed for failing to present legislative proposals and getting Parliament to implement them. Iraqi institutions have also blamed sectarian violence for the status quo. As a result, project financing transactions are not advancing as quickly as hoped. The main criticism has been made in relation to the oil and gas law and the national oil company law, often referred to as the ‘dysfunctional laws’.
The current situation in Iraq is that coherent oil and gas and hydrocarbon policies and laws have not been fully introduced and oil investments are outside the scope of the National Investment Law. The oil and gas law drafted in 2007 has been the cause of much controversy and political quibbling because it adopts a federal approach vis-à-vis regional ownership and management of oil resources.
It is contended that the law is directly in conflict with the Iraqi Constitution, namely article 111 that provides “that all oil and gas are owned by all the people of Iraq in all regions and governorates.” Yet, article 112 calls for joint collaboration between regions and the federal government.
There are significant issues linked to the interpretation of the above constitutional provisions such as the definition of present, future and non-operational fields and the ineluctable question of how to allocate power between regional governments and the federal government.
The Kurdistan regional government has signed oil contracts with foreign companies on the basis of article 112. In late January the central government placed these contracts in a legislative vacuum by considering them null and void before slowly easing their objection until withdrawing it altogether. The official reversal is but another sign of how the government is slowly coming to realize that it will need international talent and investment (and especially international oil companies) to achieve its stated policy goals. The challenge for Iraq however will remain the reconciliation of its constitutional objectives, commercial realities, sectarian interests and a “balanced division of oil and gas resources.”
Proposed solutions
As explained above, there is a lack of legal certainty and very a high risk of not being able to enforce contractual agreements in the context of international transactions. Although this has not stopped investors fully investing in Iraq, it has not benefited the country, nor strengthened its reputation. Banking laws introduced by the Central Bank Law are designed to align Iraq with international banking standards and are positive. However, greater regulatory sophistication is required — such as clearer provisions on taxation of banks, competition, servicing and technological improvements in order to facilitate ATM transactions and credit card processing. These changes will assist in the development of local banks and will attract the establishment of foreign banks. Greater clarity on the ownership of resources is also a must. Employment laws need to be refined and codified in order to provide measurable standards of protection for foreigners. The harmonization of internal laws must be progressively implemented to avoid the introduction of new conflicting laws. Speeding up the drafting process of legislation is also indispensable; presently, it takes years to submit a law to the Iraqi Parliament.
These challenges would be formidable for any country, and are only more so for Iraq in its current state. Mesopotamia was the cradle where civilization was born, and so it might be said that this is a country in need of a rebirth.
NICOLE PURIN is legal council at Standard Chartered Bank
