What will it take for investors to return to Kurdistan?

For a decade, billions of dollars from foreigners, particularly from the Gulf, helped transform Erbil into a booming capital. But economic and security crises since 2014 have suspended thousands of projects, leaving the city and investors in limbo.
What will it take for investors to return to Kurdistan?
under construction, slowdown, building
By Courtney Trenwith
Fri 10 Jun 2016 12:24 AM

It was only three years ago that Erbil, the capital of Iraqi Kurdistan, was being compared to Dubai for its rapid progression and extraordinary level of construction. Gulf investors were among those who rushed to make their next big bucks in the new tiger town.

Today, similarities are still being drawn, but for entirely different reasons.

Now a grey-scape, Erbil’s skyline is punctuated with paused cranes and unfinished cement buildings. The drab scene, accentuated by the quietened hype that once gave the city a buzz, has barely altered since 2014. In January that year, Baghdad cut off the region’s only form of sustenance ,17 percent of the central budget, then worth $14bn.

The Kurdistan Regional Government (KRG) had controversially built a tunnel to export oil to Turkey and that quickly became the region’s only lifeline. But by mid-year, the value of oil had also crashed and prices remain less than half the level of two years ago.

At the same time (August 2014), militant group ISIL banged on the door of what had been considered the safe haven of Iraq.

As residents bunkered down, their enemy within 20 kilometres of the city centre, foreign investors fled. Few have returned, and those who have are merely propping up existing businesses or finishing off almost-complete projects, their investments already too great to lose.

Erbil now more closely resembles Dubai during its economic crisis in 2008-09. Catastrophically, however, the autonomous region has far more sandbags weighing it down and far fewer options to escape its malaise.

Businesses say the threat of ISIL, while geographically nearby (the frontline has been about 40 kilometres from Erbil for nearly two years), is a minor concern compared to the liquidity crisis caused by both Baghdad’s budget cut-off and the collapse in oil prices.

In a scenario familiar to the GCC, Kurdistan’s state revenues are all but derived from oil, with less than 1 percent from taxes. Now, with debt levels critical, the government has been forced to stall more than 4,000 projects.

“The low oil prices have destroyed everything,” says Noori Abdulrahman, the minister in charge of following up on government decisions and acting chairman of the Kurdistan Investment Board.

Bustling just two years ago, Kurdistan has quietened down.

In 2013, a record $47bn foreign direct investment was injected into the region. GCC investors were among the most vigorous. Majid Al Futtaim opened multiple Carrefour supermarkets and four GCC airlines launched direct flights to Erbil in 2012 or 2013 (although Emirates Airline and Etihad Airways have not resumed services since they were twice suspended due to security concerns).

The interest in Erbil saw Dubai Chamber of Commerce open only its third international office there in January 2014, and in June that year UAE economic officials urged Emirati investors to tap what they described as the “very promising markets” of Kurdistan.

The Chamber still promotes the region as having “strong business potential” but in a statement to Arabian Business, it said: “The current security challenges facing Kurdistan-Iraq have contributed to a noticeable economic slowdown. Dubai Chamber remains at its members’ disposal to offer its full range of services and continues its commitment to the Kurdistan region through meetings with public and private sector officials.”

In October 2013, just months before the crisis began to unravel, Dubai-based property developer Emaar held an elaborate launch of a $3bn masterplannned development that aimed to replicate Downtown Dubai, with 15,000 residences, three five-star hotels, office space and the city’s largest shopping mall. The choice of name - Downtown Erbil - spoke volumes of the developer’s belief in this emerging city.

The project never broke ground and Emaar has declined to comment on its status.

Multiple hoteliers – from Hilton to Marriott International and Kempinski - also have suspended their plans for five-star hotels, leaving enormous advertising boards to fade along with the dreams they promised.

For Abu Dhabi-based hotel group Cristal, it was too late. It had already announced three new hotels when the crisis hit, with the construction of two already well advanced.

“The timing couldn’t have been worse,” COO Kamal Fakhoury says. “Up until about 2014 … it was boom time.”

In the period after ISIL threatened to control Erbil, hotel occupancies were “very, very low”, Fakhoury says. They have picked up since, but the clientele has changed dramatically. Hotels now accommodate diplomats, military personnel and the occasional journalist, who have replaced the businessmen and tourists they were designed for.

“I wouldn’t say we’re doing good but we’re doing okay, considering what’s happening,” he says. “The hotel is running at about 40 percent occupancy; at least we’re paying the bills – no losses.

Flydubai’s daily flight to Erbil is still often sold out.

“Once the situation is sorted out then there will be huge potential for Kurdistan and Erbil.”

Contrary to its competitors, Carlson Rezidor Hotel Group signed its first hotel in Erbil after the crisis began, with doors due to open in 2018. Despite the current difficult circumstances, vice president business development for the Middle East and Africa Elie Milky says he regrets not going in earlier.

“It remains safe,” he says. “The sentiment has been impacted, you cannot deny that, but that doesn’t mean we wouldn’t look at opportunities there.

“Hopefully by [the time the hotel opens] the situation in the region will have improved drastically.”

While property development and oil have built Erbil to its current state, the emphasis is now shifting to diversification, with agriculture, industry and tourism at the forefront.

Kurdistan has fresh, cold water and plenty of arid land that would make it ripe to become a leading exporter of fresh produce. But it lacks the industry and expertise to cultivate it.

“The agriculture industry is very important for this country, we have very good organic fruit here, especially in the Dohuk area, maybe it would be enough for the whole Middle East, actually, but we don’t have the market,” the investment board’s Abdulrahman says.

“Previously it was being marketed to the Gulf states or Baghdad, but … after the uprising in 1991, they’re not allowing our farmers access to the market. Everything is ready, we have the same quality - maybe the quality is better - and the quantity is much more. [For example], we have around 68 kinds of grapes but we are not getting the benefit of that. You can change it to fresh juice but we don’t have the industry.”

Kurdistan hopes to leverage its scenery and rich history, including the Erbil Citadel, to revive its tourism industry.

The investment board has been encouraging foreign agriculturalists to build glasshouses in Kurdistan to ensure there is sufficient product to meet export orders. It also needs investment in packaging and canning. Additionally, farmers would need to be convinced to return to the land; many gave up their rotting farms years ago to seek an income in the city.

But even if Kurdistan can produce large quantities, Abdulrahman says prices remain very low in the Iraqi market, while it would face tough competition from neighbours Turkey and Iran, which have already established strong presences in foreign markets.

Simultaneously, the government is driving investment in industries such as steel factories and assembly. Abdulrahman says it aims to start with products that have domestic demand, including vehicles, refrigerators, televisions and washing machines. But it is being built from scratch.

Tourism could be easier to get off the ground thanks to Kurdistan’s abundance of beautiful scenery and history. The largest mountain in Iraq is within Kurdish borders, while resort towns flourish during summer. Kurdistan was voted the Arab Capital of Tourism in 2014 but it was never given the chance to take advantage of the attention, with economic woes and ISIL both descending on the region during that year.

While the government lacks funds to promote tourism, the security situation means Kurdistan will have a tough job differentiating itself from the rest of Iraq for some time.

Rawand Askary, the head of the Kurdistan office of UK Trade & Investment (UKIT), a state body that supports British companies abroad, says the current crisis opens a significant opportunity to re-arrange the region’s economy.

“We know they’re in need of fresh ideas, a fresh approach to their governance, for example,” Askary says.

Earlier in the century, health services improved phenomenally - Abdulrahman says patients from neighbouring countries are now travelling to Kurdistan for treatment - and education. The region has among the highest literacy rates in the Middle East and has 17 universities. The four big financial services firms also have offices in Erbil.

But Askary says investors need greater confidence in the current situation. Between 2007, when UKIT opened its office in Erbil, and 2014, more than 120 British companies launched operations in Kurdistan. That number has since dwindled.

This privately built White House replica symbolised the new wealth in Erbil.

“Some companies have restructured, some of them are working out of their Dubai hub and they visit [Kurdistan] on a regular basis. It’s just a reshape and a re-organisation,” Askary says. “A lot of companies are waiting for the situation to get better, they don’t entirely leave but they keep a good track [of what is going on], maybe minimise or change their business model so they can keep up with the current economic situation.”

Majid Jafar, the CEO of UAE-based Crescent Petroleum and managing director of the board of its affiliate Dana Gas, together the largest private oil and gas investor in Kurdistan, says the region’s potential is hampered by politics and delayed payments.

A London court recently ordered the KRG pay Dana Gas and its consortium partners $1.98bn for underpaying it for condensate and liquefied petroleum gas products supplied from the Khor Mor oil field.

The consortium still has further claims against the KRG for more than $11bn, mainly for what they argue has been interference in their rights to the two fields. The KRG also has a counter-claim for $3bn.

“It’s not just the resource potential that’s holding it back, it’s the above-ground issues, things like payments and politics,” Jafar, an Emirati of Iraqi origin, says.

“At the beginning, [the KRG] was very welcoming and pro-investment and the contract that was signed - not that they were overly generous - was the type that the international oil and gas sector recognised but it’s important that the government upholds its part of the bargain.

“Contract stability is critical in the oil and gas sector, especially in high-risk areas. The payments are an important issue.”

However, Jafar remains confident and committed to the region and believes it can at least double its oil and gas exports, from a current 500,000 barrels per day.

Dana Gas has continuously operated since dropping its first drill in October 2008.

“There have been ups and downs for the industry and that’s the sentiment overall,” Jafar says.

With less foreign investment streaming into Erbil, local businesses are also suffering.

“Kurdistan is still the safest part of Iraq. It’s all relative. Iraq is, overall in the last few years, less safe but nevertheless we have not faced any impediments to our operations, unlike some of the majors who perhaps over-reacted and withdrew all their staff; we’ve never withdrawn staff and continued our operations.”

Askary says the current lack of willingness on the part of large multinational firms to invest in Kurdistan should encourage the KRG to adapt its investment climate to support smaller businesses, whether local or international.

“It may be a way for SMEs, smaller-sized or medium-sized businesses, to come into the region, and blossom entrepreneurship,” he says. “This is something that really needs improving: having a culture where entrepreneurship can really thrive in the Kurdistan region.

“[At the moment] the SMEs are not going to thrive in this environment because there’s a lot of competition with the big boys.”

While the investment law is “friendly” it needs to be adapted to reflect the current situation, he says.

“The KRG is very available to international companies, they want to work with international companies, but they have to understand things like the finance sector or a wider banking sector, which companies can be confident in, and risk management, are something they really need to look at in terms of improving the confidence of an investor to invest in the region and know that their time and their money is safe.

“They also need to privatise; the private sector is small. This would help to boost the economy.”

Local businessman Faisal Karim Khan Bradosti has personally discussed with the government privatising sectors such as electricity, water and roads, and Deputy Prime Minister Qubad Talabani says the government is in the process of preparing to privatise at least some aspects of the electricity sector.

But even Bradosti, who runs the family business Zazik Group, started by his father at the end of the 1991 uprising, has not had an easy run in his home territory.

He says he and Bahraini partner Jawad Group were forced to rebrand Kurdistan’s first café days before it was due to open when its joint venture partner, US coffee chain Costa Coffee, suddenly pulled out.

While prosperity in the Kurdish region of Iraq has declined in the past two years, hopes that international investors will return remains high.

“Once we finalised everything … less than one week before the opening, [Costa Coffee] changed [its] mind and they said we have to postpone the opening. I told them we cannot wait because we already advertised,” he says. “Then we changed the name, we did the job without any franchise.”

The café – renamed Costa Rica – was a hit, with queues up to an hour long.

“Then the Lebanese, when they saw we had demand, they came too,” Bradosti says. “Now the situation has changed; the Lebanese have all gone back to Lebanon.”

Bradosti, whose business has relied on contracts with international organisations from the United Nations to Siemens and fast-food chain Cinnabon, fears foreign investors may not came back.

“[The government] let all the investors take their investment and leave Kurdistan. If we want them to return it will, of course, take time and there may be a lot of investors who never think to return to Kurdistan,” he says, pessimistically.

However, he says Kurdistan can thrive without FDI.

“If we don’t have any corruption, or we minimise it, if we have good planning, we don’t need any investors from outside,” he says. “Iran had embargoes and still they have industry and agriculture. They produce a lot of high-technology machines. This is the power of the government, so Kurdistan has a lot of opportunities, too.

“Our problem is, all our money is going outside - to Iran, to Turkey, to other countries - because we don’t have anything, even agriculture,” he says, sweeping his hand from left to right to indicate his lounge room decorated with imported furniture.

Deputy Prime Minister Talabani says the government is working to streamline processes and make them more transparent. Coupled with action to reduce corruption, he expects FDI will increase.

“Once somebody knows what it takes to do business here - how many days it takes to set up their company, what municipal fees they have to pay, what taxes they have to pay and how to pay those taxes – one, it’s going to be easier to do business because they’re not going to need to pay some middle man to do all that work for them. Secondly, they’re protected against any potential mis-management by anyone on the government side,” he says from his office in Erbil.

At the same time, Talabani is quick to emphasise that Kurdistan is also a victim of geography and the wider economic decline across the Middle East.

“[The KRG] is by and large a business friendly government but we’re part of Iraq and we have to be realistic that the boom time of, let’s say, 2005-2011 has slowed. It’s not stopped, there’s still investment projects being carried out, but we have to be mindful the economic crisis is not just a Kurdish crisis, it’s not just an Iraq crisis, you’ve got countries all around the world, including in the Gulf, that are rethinking how they do things.

“I hope that despite the current climate that people haven’t lost hope and faith in Kurdistan. Kurdistan is still an attractive place and I think will be a lot more attractive when we come out of this current crisis, because we’re going to come out with a much more streamlined government … a much more affective government, with much clearer processes and more transparent ways of doing things.

“So I believe we haven’t let this crisis go to waste and that, I hope, is visible to our friends not only in the Gulf but also around the world.”

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