Well, thank you Kate. And thank you, John Calabrese for arranging this. This presentation came out of an idea to publish that Viewpoints article. And they said, “Tom, we have to have you here. We have to field some questions for you. There’s an incredible amount of interest on this topic.” And this turnout today evidences that fact. So listen, thank you.

And again, my name is Tom. I work with the Iraq Law Alliance. And we have two of our other attorneys here today. It’s David and Jeff, who can maybe raise their hands. They work with us in the Baghdad and Irbil offices. And in talking about this talk, and arranging how we would give it today, we realized there were a lot of different ways to give it. I know there’s a lot of Iraq experience in the room. A lot of people have different times in their lives that they may have spent. They may be involved in different aspects of Iraqi development and Iraqi reconstruction projects that are there. But with all the resources that are here at MEI, all the resources that are here in Washington, it’s probably not best to spend our time, which is very limited today, on the history of Iraq, or the politics of Iraq, or the foreign policies of Iraq, but mainly talk about what’s going on in Iraq in terms of private investment, in terms of corporations involved in Iraq.

We are a law firm of Western and Iraqi lawyers, which means that we have somewhat of a unique backstage pass in dealing with foreign companies when they come to Iraq. We can see the opportunities that they see, but then we also see the frustrations that they have in doing business there. And many of them agree all of us in this room that there are tremendous opportunities there. Tremendous opportunities. And not just the oil and gas industry, in a broad theme of industries. But there are also some serious systemic problems and frustrations that hamstring and prevent the would-be investor from going into Iraq, which is the 21st century Middle East. So with that kind of framing in mind, I thought that we might isolate some themes that I see from corporations becoming involved in Iraq, without naming any names. And then talk about some frustrations, and I’ll try to be as brief as possible and entertain as many questions as possible. If you really disagree, if you really have a problem, I don’t want to stop you from jumping in, because only through discourse do we really get to the bottom of all this. So, without further ado…I guess you all can’t see it, but that’s okay. We can pass out the slides later.

Again, this is our law firm. We employ Western lawyers, Iraqi, and also Kurdish lawyers. The Kurdish and Iraqi bar associations are different. The Kurdish Bar Association in the three provinces in the north has a separate bar, if you will, than the other 15 provinces in the south of Iraq. Different licensing requirements and different entrance requirements. But we are not Iraqi lawyers, we are Western lawyers who work in tandem with the Iraqi lawyers to help the international investor become involved in Iraq. And as far as I’m aware, I think we are the only ones on the ground doing such things.

And the first theme…I guess we should first talk about what is Iraqi law. Iraqi law—someone asked me what it was, and they said “Tom, can you describe what Iraqi law is? Because in the English model, we know it’s a development of case law and statutes over time. We know it’s a defined thing. What is Iraqi law?” And I said, you know, the only way I can describe it is it’s a quilt, a patchwork of different times and different regimes, and as they work together to produce the jurisprudence that we are beholden to in Iraq, some of these laws go back as far as the royal monarchy times, and they’re still binding unless they’ve been overruled, some of them come from the Saddam Hussein regime, and they’re still binding unless they’ve been specifically overruled, and then there was the CPA, the Coalition Provisional Authority, which issued 100 orders, and those are laws unless they’ve been specifically overruled. And then after that, we have the transitional Iraqi government, and they issued more laws, and they’re still binding unless they’ve been overruled. And then finally, with the sovereign government of Iraq, they issued their own laws, and with that patchwork quilt, with that very complex navigational…honestly a mess, we have the laws that we decipher and we communicate to the foreign investor. Again, we would not be able to advise on these without our Iraqi lawyers, because there is no central repository of all these laws. We have to search for them, gazette them, find them, translate them, and then cross reference them, and it’s a very difficult and time-consuming ordeal.

Anyway, the first theme, the first trend, if you will, and it really eclipses all others in terms of spotlight, in terms of investment, in terms of size, in terms of importance to the Iraqi government, is the petroleum, the natural gas rounds that are going on. You might have heard of the first and second rounds that happened in 2009. The first and second oil rounds of petroleum licensing. 14 companies were preapproved to take part in the oil licensing. The first bid round was in June of ’09 I believe. And the only successful company who took advantage of that first bid round was the consortium between British Petroleum and Chinese National Petroleum Company for the Rumaylah field, which is one of the many supergiant fields that are in Iraq in the Basra governate. It’s a very productive field; it’s the closest field to the off-loading port at Umm Qasr. And it also is a field that BP has been involved in for 30 years, I think. They have a long-term knowledge of the engineering and understanding of that field, and therefore they would not pass up an opportunity to do it.

There were some problems in this licensing round. The Iraqi government hired a very well-known and a very well-established oil consulting company from the US, and they developed a contract called the TSC, the Technical Services Contract, that ensured, and did its best to ensure, that the majority of profits, as many as they could, stayed in Iraq. That’s logical to me. It’s the Iraqi people’s resource, and they should have as much right of return to those resources as possible. But it really made, it really amounted to a lot of consternation within the IOC’s, the international oil companies, especially supermajors, that were used to going into different countries around the world and having their say, or their way, with contracts that they had developed. But, if you have a chance in the Middle Eastern Policy article, we cross-referenced the amount of remuneration fees, the amount of barrel target that each field is allowed, or is targeted to produce. And it’s very aggressive and almost untenable goal given out by these fields. And that’s why only one consortium took advantage of this.

Just as a side note, there were 21 successful consortiums in the first and second bid rounds in 2009. 17 involved Chinese partners. The vast majority-80% or so-of all the consortiums there are involved with the four state-owned Chinese national oil companies. So, food for thought.

The second and third fields to go out of that first round were not awarded on television, the national televised rounds. They were out of negotiations between the different companies and the Ministry of Oil and terms were slightly negotiated along the way. The first round has a very problematic aspect to it that a lot of oil companies that we speak to were turned away with. And that is something called the FOD. It’s a hybrid non-profit built between the international oil company and the state party, so you have to be in business with the state party, in this instance the South Oil Company and you will share resources and the state oil company will second employees to the international oil company. So they’re in kind of a power-sharing agreement with the state-run companies, again to keep as much revenue as possible back within Iraq.

The second round was much easier because they dropped that requirement; they dropped the FOD requirement out of the negotiation. They probably learned from the first round. They moved on and made a separate contract called a DPSC, a service contract as well and they had a much more successful second round licensing than the first round. There’s now a third round scheduled in Iraq. It’s only for natural gas and doesn’t involve any petroleum resources. So as you can see, if there’s one theme to the petroleum trend, it’s that the Iraqi government is open for business. I think the last estimates were that over a 100,000 foreign employees were scheduled to enter Basra in 2010/2011. And it’s not just the IOCs that we’re talking about here, it’s the service contract providers that are one step down; it’s then all the smaller companies that service them. So it’s a massive amount of undertaking to develop these fields that have really been development, but haven’t been developed well. And the technology that’s there sitting on these fields is circa 1967. And so I think the Chinese engineers do have a challenge ahead of them for the work they’ll do, because to develop these fields up to the point where you can meet that level is an incredible endeavor and it won’t happen in the next year or two- it might happen in three to five years.

That’s definitely trend one. So a lot of the problems we saw in the first and second rounds, as I said the FOD was problematic… a lot of the fields that were awarded out of the first and second round there was no research into who lived on these fields. So the fields might be there, and they might know where the petroleum is on the field, but there’s no idea of who owns that land. And the Iraqi land registry is not computerized, so to actually determine who owns this land and to possibly determine whether it’s possible to drill on this land involves essentially a title research company to investigate these issues. As I said, the secondment issues… so you have SOC and NOC Iraqis working with the international oil companies as their seconded employees and how that’s going to work out between these two companies is always going to be a difficulty. Are they going to treat them as employees or are they going to treat them as secondees? As I said the reiteration fees are very high compared to other areas of the developing world – Angola, Indonesia and other areas that these supermajors are involved in. A lot more of those profits are going stay in Iraq than go to the IOC.

And then I think the big elephant in the room are the legal ambiguities that surround these contracts. There’s a law in Iraq, it’s called Law 97 of 1967, which requires that all foreign contracts with non-Iraqi companies have to be ratified by parliament to be legal. So all of these awards that I just described, under a conservative legal reading of this law, are illegal under Iraqi law and possibly unenforceable. The Iraqi government disagrees and they’ve published a series of articles and opinions stating the opposite. But at most, if you take their view and the preceding view, it’s an unsettled issue, whether these are going to be enforceable contracts. If you’re going to invest a billion dollars, you know if you’re going to invest massive amounts of money, and the entire thing could be illegal or unenforceable in the first place, the whole underpinning could be nationalized, illegal or simply taken away from you in the first place. So that’s one of the big problems that we’re seeing here. This question was challenged in federal court. A parliamentary who was not reelected or did not run in the March elections, challenged it and said ‘these contracts are illegal based upon this law; they shouldn’t be here; they are entirely contrary to Iraqi jurisprudence.’ Her name was Sheida Musawi. She started this action in the Federal Court of Iraq, which is the proper court. It’s currently pending, and I think next week or this week we are up for the next stage of litigation. In any case, this is common knowledge; it’s not hidden. People discuss it and there are contrary viewpoints. These types of laws aren’t uncommon; I think Venezuela has one as well. So they’re a product of, again, the 1960’s- the socialist nationalist movement in the Middle East. But parliament has essentially said we’re not going to pass the law; we’re not going to ratify these contracts. Not one of these has been ratified.

Complicating one more factor is that they haven’t passed the oil law for three years, so there’s not comprehensive oil law. Just lastly on this: why are these companies persistent upon doing business here? Because so much is at stake and the fields are that productive.

The second trend we see a lot besides the oil and gas – you see a lot of movement in the electricity sector from various corporations who wish to take advantage of the entire dirth of power which exists in Iraq and for any of you who have lived in Iraq, you know how frustrating that is to be caught in the summer heat and not have air conditioning. But it’s really bad. The grid just can’t support the needs and power generation can’t support it either. There’s a master plan: the goal is to create 21,000 megawatts. I think they’re producing like 8,000 now for the country. But before they can even… and it’s 3 billion dollars for G.E. to provide these ten different power plants, but it’s now 4 billion and it’s G.E. and Siemens. There’s a lot of money there, but before they can even get those next 10,000 megawatts to the people who would consume them, they have to lay 7900 km of cable which is, again, a massive amount of undertaking and so to do this, to bring the Iraqi government up to this level, is just an incredible amount of work. And you’re going to encounter issues and problems with every level of the Iraqi government. If land title issues weren’t going to be researched in the fields they’re definitely not going to be researched in the cables. It’s going to be a difficult infrastructure to be involved in. We’re not even talking about the sub-station issues that would break down these megawatts into useable power, nor are we talking about the delivery systems.

The third trend we see a lot of is in the agriculture sector. If you think about how much capital, we often don’t even think about anymore… if you think about how much capital it takes to get food to the store or food to the market, this really doesn’t exist in Iraq. It’s a de-centralized area where people grow and distribute in the area that they live in. We’ve seen a lot of growth in food processing plants and people wanting to be involved in food processing plants. For the first two themes of this presentation, we were only talking about the largest companies in the world that could take advantage of those opportunities and really do those deals. In this third trend we see a kind of step down in terms of the size of the corporation. We can see, maybe, an S&P type size being involved in the agriculture. It’s just not a massive, massive international company, or a Siemens or a G.E. type company. It’s something that other companies can be involved in. It’s still, nonetheless, going to be difficult as well. I think what’s funny about, you know with all the fertile land that Iraq has, it could be the #1 exporter of rice in the world, but instead it’s the #1 importer of rice. It buys rice from the US when they could produce their own. And again, it’s not about the production capabilities, it’s about the delivery capabilities that are there, and it’s about the security issues which would prevent shipping of the good between points. So, that’s a trend that we do see and I couldn’t be happier about this one because it does allow for smaller investors, and by smaller I mean still companies, to be involved in the Iraqi reconstruction projects.

And then lastly, those of you who have been in Iraq, just the amount of work that needs to be done in creating the roads up to a useable quality. The national rail system is non-existent and there are bids out for that at this point. The airports need to be redeveloped and there’s international corporations that are involved in that. There’s electricity projects, hydro-electric projects, sewage treatment, water delivery… I mean it’s building a country up from scratch essentially through private development. But there are opportunities there, and I think what’s going to happen in the next stage is the real test because some of the companies that see the opportunities now have to go there and develop upon their vision and they probably had to go to the board and sell their idea about how to invest in Iraq, how to be involved in Iraq. And now the step of this next chapter in Iraq is how you’re going to deliver on that investment and when is that return going to come back to you? I think if you’re an oil company you know exactly when it’s going to come back to you – it’s going to come back to you when you start off-loading. If you are in other types of these infrastructure projects, I’m not sure when it’s going to come back to you… but, it will.

What’s missing from these things (and there’s probably a lot missing) – real estate investment. There’s a law that says that it’s not possible for non-Iraqis to own real estate. We just heard today that this law might be passed. If it’s passed it hasn’t been enforced yet. There is a way around this and that’s by partnering with local partners for real estate development, but compared to the other types of investment we don’t see much, if any, real estate investment.
As I said, those are the themes – a very quick overview – of what’s going on there. And as I said, with this back-stage pass, the first themes are what our clients see, and what they want to get involved in. But when they get to Iraq they find similar frustrations. I think all of them have the same frustrations and sometimes I feel like I’m a broken record because when I talk to someone I’m always saying the same things. But there are some themes in Iraq that every corporation or every investor needs to be aware of. I think the first and the most frustrating aspect is just the lack of the rule of law and what I mean by that are these corporations that want to go there want to know what laws they’re beholden to; they want to know what laws are enforced; they want to know how they do something and then they want to do that and organize their policy from New York or Houston or wherever – Paris, London… and then they want to have a predictable rule of law program that we take for granted in some of our jurisdictions here. And that’s often difficult to do because it’s a working relationship that the attorney creates with the ministerial or people that we work with in Iraq.

But also, the other frustration that I think we can’t emphasize enough, is that many of these corporations are very reluctant to incorporate in Iraq because of the time, the cost, and the energy it takes to establish a corporate presence in Iraq. Here, we get online with the Secretary of State and we can create a corporation within a couple of minutes and that corporation has a corporate personality; it is compliant with laws from the beginning. To incorporate in Iraq is much more difficult process that involves working with the Minister of Trade and the Minister of the Interior and the powers of attorney that must be conciliarised and the details – the devil’s definitely in the details – but the time frame to create a corporation in Iraq, to get the corporation up and running, is going to be a minimum of four months. And that’s the time it takes for my office, once all the documents are properly conciliarised from the US side. Add two to three months to these documents, and it becomes a six-month endeavor even to incorporate. So you can see how, many of these corporations want to go into Iraq, they have the idea to go into Iraq, but to even get that incorporation is six months down the road.
And also, let’s assume you are in Iraq and let’s assume you are working there, if you have a judgment outside of Iraq or if your corporation is in some dispute mechanism with one of its JVs or its counterparts, how do you enforce that? How do you seek relief from the Iraqi courts when your parties, one is in Paris, one is in Angola, and one is in the US. And also Iraq is not party to the most widely accepted convention – the New York Convention. So you’re subject to the Iraqi court system almost from the beginning and I think there’s a great reluctance of international corporations to use that jurisdiction for dispute resolution mechanisms, especially given the large amount of resources that are outlaid from the beginning.

Again, one of the major obstacles that we see is that the laws that they’re beholden to just generally aren’t available in English. And the ones that are aren’t annotated or shephardized. So there are these codes that have been very meticulously updated and very meticulously used often only in Arabic. And you can’t very easily understand what’s binding; it’s very problematic if you are a compliance officer, say, it some large corporation and you want to invest in Iraq and you’re not even sure what laws are enforced.

The second obstacle I see time and time again is the corruption issue – and it’s such a huge issue. I think what’s going on right now is the Department of Justice is increasing their enforcement of FCPA violations and so to even work with… I’ll give you another quick example. There’s one major electrical company that we work with, it’s a Fortune 500 company… to even do business with an Iraqi counterpart they need to hire a law firm to do a due diligence on that company to determine every single level of management and ownership and have that company sign an FCPA waiver. So it couldn’t be a bigger issue because, again, at nearly all levels of the government you encounter some types of corruption and they’re pretty creative about how it happens and they’re pretty creative about the way it goes. It is criminalized under the Iraqi penal code. If you look in the Investment Guide if you have it, on page 56 is a description of how it’s criminalized. At the end of the day though, it’s still rampant. Someone asked me ‘when will it stop?’ You know, how long will we have to wait before this corruption stops, before it subsides? And I thought about it for a little while and I said, ‘well how long did it take in the Eastern European countries?’ In those CIS countries it’s still prevalent but what needs to happen is those wages for the ministerial employees need to rise to a level where they don’t have any interest or need to have a bribe because right now, they have no other way to live their lives than with the bribe.

So many companies right now, I think, they see the landscape in Iraq, they see the people that they have to deal with, see the ministries that they have to deal with and they see how difficult it’s going to be with the cost on top of their investment. And they’re frustrated.

The next big obstacle we see is security. As I said in the beginning, this is not a discussion of the security situation in Iraq or the politics in Iraq, but I can say that the security situation as it relates to companies is a cost. And these corporations, which would normally just be doing business in the US or in Europe, now have to hire a security company; and these security companies are extremely expensive. I flew out of Baghdad two weeks ago: to get to Baghdad from the US was $2,500; to get picked up on a one-way from Baghdad Airport to the Green Zone was $2,500 for 10 km. I would have to work five hours at my billable rate, or more than that probably, just to even pay off that airport pickup. So if you can apply that to a large corporation operating in the West Qurna Field, with all the material that they have to protect, all of the employees that they have to protect, all the issues that they have to deal with… they have to add a security cost on top of that. So to say it in a different way: it’s not the security issue that keeps companies from being involved there, but it’s the cost of security that’s cost prohibitive. And that’s something that they have to bear internally.

And the last obstacle that we see time and time again is companies asking how they can get people in and out of Iraq, especially when they’re not registered yet. It’s in flux, no one really knows, it changes… there is an immigration law enforced, they are rules enforced. The SOFA Acords (Status of Forces Agreement) discusses contractors and how they have to have proper immigration but it was never really enforced until the March 2010 elections. So the use of Department of Defense badges as immigration continued; it changed abruptly, it changed abruptly again… There are Ministry of Interior officials in some ports of entry, they’re not in others… So it’s extremely difficult. And again, especially when you want to understand what laws are enforced; you want to understand how you can create a business model in a difficult region and a difficult country. I can’t understand how difficult that might be when it’s difficult to even know how you get people in and of there.

So what people are doing nowadays is they’re working in tandem with registered security companies to glean visas and they’re using the security company’s connections or previous contracts to glean visitor visas from them as Department of Defense badges are no longer being used.

I don’t really want to spend too much on this because I’ve already gone further than I should have, but I will say that the SOFA Accords that came down in late ’08, early ’09, were in place, again the immigration part of it wasn’t until March of 2010, and that’s an internal Iraqi question of why it wasn’t. The new Iraq is not a security-based Iraq; the new Iraq is a private corporation-based Iraq. The time of security is waning, so they corporation involved see the opportunities and they see the potential there. It’s just a matter of how much they can overlook, essentially, because these are just the main ones. We can go on and on forever. And these obstacles that we see would be, I think, prohibitive if it wasn’t any other jurisdiction but Iraq. I mean, how can you ask an oil company to overlook who owns that land that they want to drill on? Hey, these are major, major obstacles that I think… that for me is the test of the next 10 years in Iraq– how much these corporations will overlook in terms of costs… and they will compare this in under a marginal cost type of return, to see how much return they will get versus how much cost they have to overlook. If there was an equation to create that…

I’m sorry I already overstepped my bounds… but the domestic legislation, I said, is complicated. It spans over the different regimes over time. It hasn’t been formally consolidated. There is one place where it has been consolidated. I think the UN tried to do it and it’s an incomplete at best attempt at it: the incorporation of corporate entities. I think it turns away many companies that want to be involved in Iraq but they have to invest legal fees, time and energy to wait six months down the road. All of the CPA orders and the new law that came down – they’re good laws and they do a lot of help for Iraq, but at the end of the day the ministry officials that are there that you have to deal with might not know what these laws are. They might not be receptive to a foreign investor trying to tell them how it works, so I think you have to be cognoscente. One rule that I always tell people that I work with is just to give as much respect as you can to the people you deal with over there because we are guests in their country and they’ve gone through a lot more than I have in the past seven years.
As such, if you’re willing to overlook some major problems and some major obstacles, there are some major growth opportunities. I think everyone can agree on that.

So I think that’s it. And again I’m sorry for overstepping my time. It’s just a brief – the themes, the practices and the frustrations of doing business in Iraq. And I guess if you have any questions…
Question (Kate Seelye):
That was a very insightful and enlightening look on the challenges of doing business in Iraq and I think what is so clear is just how much needs to be done. How many kilometers of line needs to be put down for the electricity sector… and how incredibly difficult it is to get anything done. I heard a lot of skepticism. If you’re not in the oil and gas sector it sounds like to have the resources behind you to invest in Iraq is very difficult. But I’m wondering if, before we open the floor to questions, if you could elaborate on those outside the oil and gas sector who are working effectively and productively and profitably in Iraq, and if so, what is the secret to their success, or do they not exist?

No, I think they definitely exist and I’m trying to think of a good example. There’s a lending institution that I know of that I just met with here in DC and they are very productive in terms of medium-sized loan that respect the size of the Iraq market. They don’t loan to massive institutional sizes because of the ability to collect on those loans is suspect and the ability to be beholden to the Iraqi criminal justice system is also very high. But they also don’t give microfinance loans that make the cost of doing business just that much more difficult. So they’ve found that perfect medium of mid-sized loans that’s receptive to the Iraqi population but also receptive to the growth aspects of the country. As I said, the GDP is expected 9% in 2010 and then 12% in 2011. To the extent that there are accurate figures, you have to assume growth.

(question from the audience)

I’m sorry I couldn’t hear you. The size of the loans? Nothing more than 2 million; nothing less than 100,000. That’s a medium-sized loan, because I said with this oil and gas sector it’s not just these major corporations that are doing it – that’s what we hear about, that’s what we talk about – but there’s literally an armada (and I mean that, an armada) of smaller corporations in Jordan, Bahrain, Dubai that are waiting to come in once they’re set up. And those people are going to get passed over if they talk to an institutional bank. They’re going to get passed over because of their size, but then they’re too big to get a normal loan from a normal bank. So, I think an understanding of the market… and I will say this: no matter what size you are, no matter if you’re large, medium or small, you kind of have to work with a security company. I kind of downplay the security issue (it’s all good, it’s time for investing…) but they do offer quite a bit. They have on ground business intelligence and you do need security in many different places. So it’s understand the market and then work with a security firm.

I get the impression that despite all the political turmoil and the corruption and so forth that there’s a pretty competent civil service that’s carrying on. After all they’re managing all the existing services such as they are and in spite of the lack of guidance from the parliament. But they’re also preparing master plans and, as your outline indicates, and negotiating oil contracts. Are these people, to a large extent, hold-overs from the Saddam Hussein regime? And, if so, has de-Baathification been an issue within the civil service, as it obviously has been in the armed services?

That’s a fantastic question. First off, to the extent that I think there are competent civil servants, I think that’s correct. There obviously are; there are just so many of them, there are bound to be some good ones out there. These ministries are really huge. I forget the number of people that work at the Falk Oil Company, which is maybe a mid-sized oil company in the US. I think 10 to 30,000 people work there. So they are enormous. To the extent that they’ve developed master plans, they have developed them. They’ve had a lot of international consultants help them do it. So they’ve produced some great work and they’ve also contributed to that, but at the end of the day, I think the amount of consultant work plays a huge role in that.

To the extent that there’s a de-Baathification movement, I would take a step further than that and say that there’s obviously a political movement inside these huge institutions because they’re so large. And there’s obviously a Maliki/Allawi divide just as there is a Baathification/de-Baathification divide. So yeah, it is an issue.

I’m Brendan Johnson; I’m with CDC Development Solutions (our acronym is CDS). Our main mission is in small and medium enterprise development. We work specifically in a large part with oil and gas extraction companies and our belief is that they should invest locally through supply chain development activities in order to build up the local economies and it’s a win-win for both sides of the party. So our expertise is in everything from building the SMEs to providing capacity to business service providers, supply chain development and all that. Specifically, the majority of work has been in Africa but we’ve been contracted in the past few years by AID and DOD to do work in assessing SMEs in Iraq and our interest is in working with the oil companies or service providers in creating this supply chain development. So my question would be, do you see a trend within the government for this type of SME development, and specifically do you see any legal indicators that are currently there or you expect to be there for local content development?

Ok. I’ll guess I’ll take the first part first. These large oil companies… there is a movement there to work with the local population, and if you deal with them you’ll see that there’s the project side, the corporate side, the political affairs side and then out of the political affairs side there’s a person whose jobs is allocated to do just that. I’ve met them and nearly all the oil companies that I deal with have that capability and have that function. It would not be there had the government of Iraq not asked for it or encouraged them to do it. So I think there is something there. It’s not just something that I think will be an integral part. I don’t know of anyone in the government who said, ‘oh yeah, that’s a great opportunity, let’s go do it.’ But the fact that all these oil companies are organizing their companies this way, I can only infer such.

But if you look down at the Basra government, if you look at the local population there, to the extent that we know a lot about them – it’s tribal based, Shi’a/Sunni divide – so you really have to have some good human terrain intelligence about who those people are and that function that you just described would be perfect for that.

Question: Short question. What’s the nature of the financial disclosure for a foreign company in Iraq trying to register to do business?

Mr. Donovan: Foreign disclosure requirement? The capital requirement?

Response: When you register, I assume you have to make some sort of financial disclosure?

Mr. Donovan: Depends on what you’re filing…

Response: Like for a branch office, or…

Mr. Donovan: That’s a great question. For one, you do have to file your disclosures. It depends on if you’re a newly incorporated entity. So if I set up an entity in the Bahamas, say, in 2010 and then directly incorporate in Iraq I’m waived from that because it’s a new company. If it’s over a year old, you have to give your finances, which have to be audited, to the Iraqi Ministry of Trade. Major corporations that have a large satellite of smaller companies are giving their shareholders, I guess the S-10. They’re using that as the requirement.

Response: But you have to give the government your audited financial statements?

Mr. Donovan: Correct.

Response: For…?

Mr. Donovan: To suffice that you have an adequate capital entity in Iraq.

Response: And are you seeing resistance to that?

Mr. Donovan: No. I see it as a jurisdictional requirement that the employee and the company’s registrar sees. He’ll look at it to see if it’s in order and then he’ll put it in the file. I don’t see any investigation into it.

Response: May I ask one follow-up? What if a company sets up a new company that’s a foreign company and that company comes into Iraq… so in that case the financial statements are essentially zero.

Mr. Donovan: Yeah, that’s why I said in the beginning if it’s a new company you’re waived of this new requirement. If you’re less than a year old, you don’t have to give the finances.

Alexander Kravitz. I have a follow-up question on this trible… I actually have two follow-up questions. One is: What are the rights of the tribes? In relation to that, what possibility would there be to partner with a certain tribe to develop a field? I understand that there’s some kind of preferential scheme in the law? And quickly – I know you talked a lot about Iraq, but I’m wondering if you could talk briefly about the Kurdistan region in the North.

Yeah that’s another huge obstacle we see with the IOCs is that.. I said there were 14 companies that were pre-approved to do business in Iraq – did you get that stat? – 14 companies that were to take part in the oil rounds. There were 15, but one of them did business in Kurdistan and he was not allowed to work in Iraq. So one of the major obstacles that we see in the oil and gas region is that the Kurdistan has a separate petroleum jurisprudence than the federal government, it’s different. There’s a separate parliament. Kurdistan has a petroleum law, it’s already been enforced; Iraq doesn’t. I don’t want to talk about politics but you kind of have to in this regard… there’s a political debate between the two about production and I think the Kurds would much rather go forward and produce. They have two great fields: the Tak Tak oil field and I think the… I don’t remember but they also have a pipeline through Turkey in the Jaihan pipeline. So I think the Kurds would much rather go forward with that, and I’m just speculating here, they use that as a bargaining too versus federal Iraq because federal Iraq hasn’t passed their law yet. They want to pass it but the problems in parliament and the lack of government prevent them from doing that.

To the extent that tribes have right to own land, I don’t know about that. There are some countries in the Middle East where there are grazing rights and your rights to use land. Iraq is a land notice jurisdiction. It’s a civil law society where the formalities of law matter. So to own land, there should be a stamp somewhere saying that you own it. So I don’t know about the ability for the tribes to be- they’re obviously involved in the management of the land and the use of the land, and I think the companies going in there understand that; they have government affairs dedicated to that purpose. But in terms of owning titled land, I don’t think so.

Hi. I heard recently that any foreign business wanting to do business in Iraq has to register with two ministries. And the person who said it said the Ministry of Commerce is one but didn’t know the other one. Is that…?

Answer: The Ministry of Trade (it translates the same) and the Ministry of Interior.

Question: Tom Mattair from the Middle East Policy Council. We published your article.

Mr. Donovan: Oh, thank you so much. It’s a pleasure to meet you.

Response: Other than this question of whether the federal government recognizes or doesn’t recognize Kurdish contracts, what the benefits and disadvantages of doing business in Kurdistan? And #2, what do you expect from the third auction of natural gas?

Sure. That’s a great question. To the extent that they want to be involved there, I think a lot of the smaller (I don’t want to say smaller because they’re still large companies)… Talisman Oil from Canada is involved in Kurdistan and they probably would not be able to be pre-approved for the federal tenders. So a lot of these, I don’t want to call them second-tier because they’re great companies, a lot of these companies that became involved in Kurdistan knew that they weren’t going to be pre-approved in Iraq but still wanted to play the play. So the main reason, I think, is just opportunity. But that’s only for the oil company itself. There could be a whole other presentation on investment in Kurdistan because it is that different. There aren’t as many trends, there are not as many goals, and there are fewer obstacles. And the #1 obstacle that you can’t say enough is the security up there – you can’t compare the two. That’s a great question, and just to finish on this point: to the extent that smaller companies were involved there is probably because they weren’t approved for the mid-rounds down south.

Oh, and the third round. You know, we haven’t really seen that come into play yet. I think the consulting company that has been hired hasn’t been tasked with that yet. They’re still coming back with the contract, so we’re probably going to see what that looks like. It’s only natural gas, as you said, it’s not petroleum. In the early stages I think the cards are pretty close to the chest, but if we’ve learned from experience in the first round… the second round was just that much better. And if we’ve learned from the first and second round, the third round will be just that much better. But just the infrastructure in all of these rounds even to begin to off-load stuff is just years away. I mean a whole pipeline has to be built for the petroleum and that’s the same for the natural gas. So now we have two pipelines that we have to build.

Question: My question is very simple. To what extent do you recommend local partnerships in Iraq?

Mr. Donovan: Depends on what you’re trying to do.

Response: Medium sized business. I know about the oil companies, but what if it’s in real estate?

Mr. Donovan:
That’s a great question. And I like the way you phrased that because CPA Order 1 removed the foreign ban on foreigners being involved in corporations in Iraq. And a lot of companies that I work with look at that and say, ‘oh, we can do it.’ But your question was better; it said, ‘how can we do it better and work with people?’ and I really like that.

But I would say it’s crucial. I could Iraqi partner can mean everything, especially in the real estate investment game and you have to have one. I think in other jurisdictions in the Middle East – Kuwait and Saudi – you’re beholden to these local agents, you’re beholden to these individuals. Here you are, and I think the relationship could be strengthened.

I’m Ed Mickey with the American Arab News Agency. Do you see any special treatment for Iranian companies operating in Iraq? Are they being treated differently? Do they get any special treatment given their old relationships with people now in power in Iraq?

Well technically under CPA Order 1 there shouldn’t be. Whether an individual in the Ministry of Trade or Ministry of Commerce deals with that, that’s a different story. You know haven’t really been involved in many Iranians investing in Iraq. We were ed by one person but it just didn’t pencil out. But I know based on the law, there shouldn’t be a problem.

Hassan Chehaitelli from DoD. You’ve talked about local cement production. We’ve seen success in foreign investment in cement Iraq. Why do you think it hasn’t succeeded as much in other industry, in other sectors like oil and electric? Is the Iraq government enforcing different conditions on other sectors like they have in cement?

Well cement production is unique industry. We’ve been involved in many of these deals. I know up in the North there’s one such deal and the government is actually paid in cement and the government has an incentive to make the thing work that much better. If you look on the daily balance sheet so much goes out on trucks to Turkey or the rest for sale and a certain amount goes to the government. So I think there’s an incentive for the government to make that work because they actually need that element to make their infrastructure work. I think that’s probably the main reason – they actually have an incentive in its production.

Roxanna Faily. I work for the World Bank. I have two quick questions for you, one in follow-up to the Kurdistan issue. If this applies, if your viewpoint applies to sectors beyond oil and gas. So if there are potential breach of contract issues for someone operating in infrastructure for example. And the following question is: I’ve heard you talk a lot about how much companies need to overlook the obstacles; how much are they willing to play? What are these companies doing to mitigate these risks? Are there roles for systematic risk mitigation for entities such as OPEC? What’s being done?

Sure. They do as much as they can to mitigate the risk. Working with security companies is probably the number one thing they do to mitigate the risk and they don’t offer just security. They offer a variety of different consulting capacities. Probably the main one that people take advantage of is doing a due diligence on every single Iraqi party that they come in with. Just to give you a quick example of a company we’re not involved with: FedEx just pulled out of Iraq because the company that was managing the airports they couldn’t determine the ownership of. They said, ‘Listen, we just have to use this company we just can’t figure out who owns it.’ They said that the DOJ is just too active in this role; the FCP is probably and so listen, it’s just not worth it to do business. So I think working with a security company, due diligence, research, understand the target market – being an expert on the target market beyond your normal understanding of a developing economy – is probably the #1 way you can mitigate risk.

What was your first question again…? Yeah to a certain extent. You know the oil and gas just eclipses all. So there are other industries there but I think if you were ever to look at the numbers and pencil them out you’d see that the oil and gas industry is just 2:1 or 3:1 in terms of foreign investment. So yeah, it does.

Question (John Calabrese):
Thank you for the presentation, Tom. I have just one question. I have you seen particularly countries from outside the region, or from a particular region outside the Middle East, demonstrate a higher propensity of incurring the costs and risks of doing business, than say a typical American company.

Yeah that’s a great question. And John thank you for everything you’ve done for us with Viewpoints and this presentation. It’s a great question and the answer is China. The Chinese, the way they operate in Iraq is just so different from everybody else. If you see the way they live, they live in a hotel. They don’t have a compound, they don’t have a walled off… I tried to get into the US Embassy to meet with a colleague and I wasn’t even allowed in the compound. The Chinese live in a hotel. Their Arabic is near fluent. They don’t hire security companies and if they do it’s maybe on an anecdotal basis. They’re able to borrow from the Central Bank of china at almost 0% rates. So they can finance these incredible infrastructure developments at little or no cost. So it’s just difficult to compete with that market.

Question (Kate Seelye): Why are they [China] so unconcerned with security? Are they just not at risk the way a Western…?
Answer: Sure. I think we paid a huge price for this as the United States and I think they’re just much lower on the priority list.

Naufel Alhassan from the Iraqi Cultural Attache. Thank you for your presentation, but I have a couple comments. I agree with many of the facts that you presented but unfortunately it looks like you put a pessimistic perspective when you presented these facts. If I assume myself as an investor, when I look at these numbers I would probably pull myself back a little bit, but I’m sure in China or somewhere else they present the same facts in a different way. I’ll give you one example. For example, the visa – you don’t need to go through the security companies to get a visa. I can assure you that if you come to my office, within a couple days… probably last week we received an order from the Ministry of Interior. They have to issue the visa for a foreign investor within 24 hours. I know sometimes your application gets lost and I do agree with you that there is a lot of information that the Iraqi government and the Iraqi private sector needs to present so that it will be available to the investors.
But I can give you another example. With all these challenges that you presented, there are a lot of opportunities. Two things: last May at the Investment Conference in London, a lot of investors raised the issue of purchasing land for real estate and housing projects. The Iraqi government, within 11 days, put a proposal to amend, revise the Law #13 for 2006. It takes a couple months, or probably a little bit more to pass it through parliament. So now, foreigners can purchase land for housing projects. Probably you and a lot of the audience knows that there is a deficit around 3 million housing units for the next couple years. So there are a lot of opportunities now, and it’s not just in housing.

Now the second thing that is linked to your concern and many other friends here… American experts have a responsibility to, not paint a rosy picture in Iraq or mislead them, but guide them to these opportunities in Iraq, otherwise… because we have an urgent need in Iraq. If American investors cannot address it someone else will address it and we cannot wait for that.

Answer (Tom Donovan): Thank you for that. Is that true, that the real estate law is amended so now non-Iraqis can own real estate? And when did that happen?

Response (Naufel Alhassan):
It’s solely for housing projects. Right now if you would like to purchase land for a factor or anything else… definitely you can lease it for a time up to 99 years with a renewable option.

Tom Donovan: So foreigners are not allowed to own land?

Naufel Alhassan: Yes definitely. It’s for housing purposes only. Now it’s allowed for foreign people to purchase land to build housing projects only.

Tom Donovan:
Thank you for informing us of that. We were aware that there was an exemption to the law, but the law, we understand, is still enforced. So that’s how we’re still counseling clients. But I totally agree with you. When I talk to clients I couldn’t be more optimistic about Iraqis’ future. I think if you chart out the security situation and just project it forward, what we’ll see is a diminishment of all of those obstacles that we just talked about here and I, for one, could not want it more for the people of Iraq and for the companies that will be involved in Iraq. But as a lawyer, I have a right and a duty to inform people of what they’ll see, and it’s… take your medicine. Now or later.

About this Transcript:
Assertions and opinions in this Transcript are solely those of the above-mentioned author and do not necessarily reflect the views of the Middle East Institute, which expressly does not take positions on Middle East policy.